Safaricom's share price has fallen by 15% over the past 20 days to close at KES28.10, after hitting a high of KES32.90 on 5 February – the move can largely be attributed to a foreign investor sell-off.
We believe there is price upside based on our forecast of 20% yoy revenue growth in FY 20 (excluding Fuliza revenue) from M-Pesa (Safaricom's mobile phone-based money transfer, financing and microfinancing service), driven by sustained growth in P2P and business-related transaction value, and additional income of KES2.4bn expected from Fuliza, the M-Pesa overdraft service.
We anticipate further efficiencies in margins arising from increased M-Pesa usage, reducing the likelihood of withdrawals and lowering airtime commissions; as well as a slowdown in the growth of network-related costs.
Our current valuation excludes the impact of the company's entry into Ethiopia, which Safaricom will pursue as part of a consortium whose constitution has yet to be finalised. Ethiopia's sub-50% mobile penetration and population of over 100mn suggests a strong case for revenue upside in voice and data.
We maintain our target price for Safaricom at KES31.24, but recent price movements mean we upgrade our recommendation on the stock to Buy from Hold, with a 16% expected total return.
Risks to our forecasts include competition in the mobile data segment from an Airtel-Telkom merger and the implications of the regulator's review of mobile money transaction charges.