Equity Analysis /

Safaricom: M-Pesa strength offsets traditional revenue weakness

    Tracy Kivunyu
    Tracy Kivunyu

    Equity Research Analyst, Telecoms

    Tellimer Research
    31 October 2019
    Published byTellimer Research

    Safaricom continues to face competitive pressure in the mobile data and voice segment and has implemented price cuts to protect market share. However, we think the impending merger of Airtel and Telkom may serve to intensify the current competitive environment, and thus we moderate our revenue forecasts.

    But we expect M-Pesa revenue to remain strong, boosted by subscription growth as well as P2P and new business transaction value growth. Fuliza will report its first full year with an expected KES1bn additional income. We deem the potential Ethiopia acquisition as positive for traditional telco revenue, but we are concerned about regulatory constraints to the mobile money model.

    Our stronger margin estimates for M-Pesa offset the perceived pressure on future traditional revenues, therefore we increase our TP from KES27.42 to KES30.04 and maintain our Hold recommendation.

    Safaricom will release H1 20 results on 1 November. We expect 10% yoy EPS growth to KES0.86 with revenue growth of 7% and EBIT growth of 10%.

    M-Pesa revenue and margin upside despite betting company closures. Despite a slowdown in withdrawal revenue, Safaricom has still managed to maintain strong growth in person to person (P2P) and new business revenue streams. With M-Pesa penetration at 71% as at FY19, we still see further room for subscription growth. An average ARPU growth of 8% over our forecast period yields an increase in M-Pesa contribution to total revenue from 30% in FY19 to 43% in FY24f. We expect some slight pressure on M-Pesa revenue growth in FY20 owing to the closure of betting companies in 2H20 (8% of M-Pesa revenue), but we still expect M-Pesa revenue growth of 19% in the year. Due to the increasing contribution of new business to M-Pesa revenue, we expect M-Pesa EBITDA margins to expand over our forecast period, buoying group EBITDA margins at over 50%.