safaricom update - unlocking potential in the african telco space

SAFARICOM UPDATE: UNLOCKING POTENTIAL IN THE AFRICAN TELCO SPACE

Table of Contents

Executive Summary: Recommendation, Financial Inclusion, Share Price Performance

1

Kenya Telecommunications Industry Developments: Data Revolution, Stiffening

Competition, Growth In Subscriptions

2

Global Peer Review: Regression Analysis

3

Safaricom: Pioneering Mobile Money & Data Growth

4

Share Price Triggers

5

Key Drivers Steering Business Growth: Large Subscriber Base, Robust Growth in Data

Revenue, Innovation Spurring M-pesa revenues

6

The Evolution of Mobile Money Integration Into the Kenyan Economy

9

Risks to our Investment Call: High Pricing multiples, Competition, Disruptive

Regulation, Conclusion of CEO’s Tenure

10

Financial Performance Overview

12

Valuation: DCF, Multiple Valuation(s)

15

April 2015

Research Analyst

Mercyline Gatebi

[email protected]

+254 020 277 4781

For trading queries kindly

contact:

Wanjiru Gichuru

Head of Trading

[email protected]

Direct line: +254 020 277 4789

Website: www.genghis-

capital.com

Twitter handle:

@genghiscapital

Linked In: Genghis Capital

Investment Bank

mailto:[email protected]

mailto:[email protected]


1 | P a g e

BUY: T.P – KES 20.69

Market share sustained at 67.37%

77% of Kenya’s population within a

financial access point

20.08% (FY15F) growth in revenues

and 45.07% (FY15F) EBITDA margins to

drive bottom line growth

22.42% share price return YTD

EXECUTIVE SUMMARY

Our update on Safaricom Ltd begins with a BUY recommendation on the stock based on a fair value

estimate of KES 20.69 indicative of a 20.29% upside on the current price levels, upgrading it from a

previous BUY recommendation of a price target of KES 11.70. We project a 20.09% growth in revenues

FY15F with data and M-Pesa revenue lines as the primary drivers anticipated to grow by 68% and 38%

respectively. Based on the dividend payout policy of 80% of the free cash flows, our forecasted DPS

is at KES 0.52 per share FY15F yielding 2.51%. Our forward P/E and P/B multiples are 23.39x and 8.43x

respectively suggesting a risk of temporary price adjustment if the stock is to re-rate going by the

price multiples. Expected total return for shareholders is pegged at 25.50% on account of both the

dividend yield and the current price levels year-to-date.

Safaricom Sustains Market Share: Various developments have steered growth of the

telecommunication industry in Kenya such that; the landing of the four fibre-optic international

submarine cables in 2009 with a fifth of considerably larger capacity underway, have led to significant

changes in a move aimed at boosting Kenya’s internet and telecom sector. This will continue

bolstering growth of the data space in the country hence creating more opportunity for Safaricom

to unlock potential in this growing space. Safaricom has sustained its market share growth currently

perched at 67.37% hence clinching onto the market leadership position.

Kenya leads in financial Inclusion: Financial access in E. Africa is exponentially growing as a result of

the convergence of the telecommunication sector and financial institutions spearheading financial

inclusion. 77% of Kenya’s population lives within 5 km of a financial access point in comparison to 35%

and 43% in Tanzania and Uganda respectively. The rapid evolution of mobile money in the region has

been an impetus towards global financial inclusion. The positive correlation between digitizing cash

and scaling investments in supportive technology indicates some headroom for financial institutions

and telecom operators to continue driving growth in financial accessibility. With this regard, as the

premier market leader, Safaricom is best placed to tap into the growing data and mobile money

space.

Outlook on Financial Performance FY15F: Going forward we anticipate that total revenues will grow

by 20.09% to KES 173.75 Billion (FY15F) steered largely by data revenue (68% growth - KES 19.97 Billion,

FY15F) and M-Pesa revenues (38% growth- KES 36.65 Billion). We project an earnings per Share of

KES 0.88 buoyed by decreased financial costs hence boosting the profits after tax to KES 35.43

Billion. We anticipate improved EBITDA margins of 45.07% (FY15F) on the back of increased cost

savings initiatives and declining SGA expenses.

Superior Share Price Performance: The counter has posted a 22.42% (YTD) return on the share price

attributable to a price rally on the counter over the last quarter (1Q 2015). We expect the stock to

sustain the upward trend in the run to its results announcements slated for early next month (May

2015) as investors anchor their confidence on its 1H 2015 performance. However we remain skeptical

on the upward price movement in the near term but the uptrend may be sustained in the long term

if Safaricom FY15 results support our findings.


2 | P a g e

What’s New on the Telecom Front in Kenya?

Rapid Development of Bandwidth

Availability on Mobile Devices

“Take no prisoners…”

Fears of Mobile Market Saturation

A new revolution has come to Kenya’s telecommunication industry with the landing of four

fibre-optic international submarine cables in 2009 leading to considerable changes since. The

dramatic increase in international bandwidth has not only ended the country’s dependence

on limited and expensive satellite bandwidth, but also brought down the cost of broadband

access by 90%. This has ensured that services are affordable to a larger percentage of the

population (48.81% of mobile subscribers are also subscribed on data). Kenya’s mobile market

has continued to portend strong growth in the number of subscribers. Mobile subscriptions

rose to 33.6 Million up from 32.8 Million registered in the May-August 2014 quarter. This has

translated into sustained revenue growth for operators as they develop services on the back

of heavy investments in technologies and infrastructure upgrades.

Competition has stiffened in Kenya’s telecoms industry as new players try to get a piece, and

old Don's try to hold on to the pie. This competitive intensity fraught by tight margins has

pressed the market into some consolidation. Essar Telecom’s Yu Mobile business bowed out

of the race and was swiftly gobbled up by rivals Airtel and Safaricom in a deal that saw

Safaricom acquiring its network, IT and office infrastructure while Airtel took over the 2.55

Million subscriber base of Yu mobile. The total deal value was approximated at USD 120

Million. Nevertheless, a number of MVNO licences awarded by the regulator; riding on Airtel’s

infrastructure, since 2014 have added to the competitive mix.

Global mobile subscriptions expected to reach 7 Billion by end of 2014 equivalent to a

penetration rate of 96% worldwide. In developing economies, mobile penetration was

estimated to reach 90% by end of 2014. We opine that a continued increase in mobile

subscriptions will be anchored largely on growth in the developing economies. According to

data compiled by International Telecommunication Union, mobile growth rates have reached

their lowest level ever (2.6% globally), indicating that the market is approaching saturation

levels.

Market Share Pre- Acquisition of Essar Telecom Market Share Post Acquisition of Essar Telecom

Source: Communication Authority of Kenya


67%

16%

8% 9%

Safaricom Limited Airtel Networks Limited

Essar Telcom Kenya Limited (Yu) Telkom Kenya Limited (Orange)

67.37%

22.63%

10.00%

Safaricom Limited Airtel Networks Limited

Telkom Kenya Limited (Orange)


3 | P a g e

PEER REVIEW:

In this section we performed a comparative analysis for companies within emerging markets that conduct similar telecom

operations. We narrowed down to counters within a similar market cap range.

Source: Bloomberg

The above analysis depicts Safaricom Ltd as a premium priced counter based on the EV/EBITDA, P/E and P/B metrics. Safaricom

is trading at high multiples of 12.02x, 22.00x and 5.14x against the industry averages of 6.11x, 14.25x and 2.86x respectively hence

indicative of some potential headroom for a temporary price readjustment.

P/B V/S ROE Regression Analysis:

Regression supports findings: Our regression places Safaricom Ltd above the trend line indicative of a relatively pricy

stock trading at high P/B multiples in comparison to the other peers except Maroc Telecom. This could however be

catalyzed by their attractive return on shareholders’ equity hence shielding the investors from a possible price re-rating.

Name Country EV/EBITDA P/E P/B ROE ROA Div Yield

SAFARICOM LTD Kenya 12.02 22.00x 5.14x 23.35% 15.83% 4.02%

MTN GROUP LTD South Africa 6.02 15.36x 3.36x 26.19% 13.27% 6.78%

OMAN TELECOMMUNICATIONS CO Oman 5.30 10.22x 2.15x 22.18% 15.40% 9.17%

MOBILE TELECOMMUNICATIONS CO Kuwait 5.36 9.90x 1.32x 11.97% 6.10% 8.08%

SAUDI TELECOM CO Saudi Arabia 6.07 12.36x 2.27x 18.88% 12.04% 5.84%

NATIONAL MOBILE TELECOMMUNICATION UAE 4.06 15.60x 0.97x 5.93% 2.87% 4.93%

OOREDOO Qatar 4.37 12.20x 2.44x 19.58% 10.44% 5.11%

MAROC TELECOM Morocco 7.58 19.12x 7.04x 37.48% 12.58% 5.42%

BAHRAIN TELECOM CO Bahrain 4.17 11.45x 1.06x 9.21% 4.93% 8.82%

Average 6.11 14.25x 2.86x 19.42% 10.38% 6.46%

INDUSTRY COMPARABLES


4 | P a g e

SAFARICOM LIMITED

Pioneering Mobile Money & Data Growth…

We reiterate our BUY recommendation based on a fair value estimate of KES 20.69

indicative of a 20.29% upside on current price levels. We project 20.09% growth in

revenues FY15F with data and M-Pesa revenue lines as the primary drivers

anticipated to grow 68% and 38% respectively. FY15F EPS is KES 0.88 (KES 0.53

FY14). Based on the dividend payout policy of 80% of the free cash flows, our

forecasted DPS is at KES 0.52 per share (FY15F) yielding 3.08%. Forward P/E and P/B

multiples are 23.39x and 8.43x respectively suggesting the counter remains

buttressed at overvalued territory in comparison to its peers.

Our valuation is informed by the following drivers; huge investment layouts on

infrastructure upgrades to support its burgeoning data segment, expanding

strategic partnerships on the M-Pesa platform which shall sustain its ambitions of

deepening financial inclusion and the growing subscribers. We however remain

skeptic on subscriber growth due to the global limit approaching saturation levels.

We cite the following risks to our investment call; stiff competition arising from

licensing of more MVNO’s, High comparative price multiples to its peers and

continued dilution of disposable incomes and transactional volumes on M-Pesa

platform following VAT and excise duties imposition.

BUY

Year End - 31st March FY12A FY13A FY14A FY15F FY16F FY17F

Earnings Per Share(KES) 0.29 0.41 0.53 0.88 1.11 1.30

% change in EPS -4.29% 39.08% 30.13% 66.30% 25.11% 17.45%

Dividend Per Share(KES) 0.22 0.31 0.47 0.52 0.85 0.95

% change in DPS 10.00% 40.91% 51.61% 10.72% 63.21% 11.36%

Dividend Yield (%) 7.21% 2.29% 4.02% 2.52% 3.91% 4.15%

Dividend Payout Ratio (%) 74.87% 75.86% 88.38% 58.84% 76.76% 72.78%

Price to Earnings (x) 10.38x 33.16x 22.00x 23.39x 19.63x 17.55x

Price to Book (x) 1.69x 6.75x 5.14x 8.43x 8.12x 7.77x

Book Value per Share (KES) 1.80 2.01 2.28 2.45 2.68 2.94

Return on Assets (ROA) 9.64% 12.69% 15.83% 25.50% 29.79% 31.58%

Return on Equity (ROE) 16.31% 20.37% 23.35% 36.04% 41.36% 44.27%

Report Date Date 29-Apr-15

Bloomberg Ticker SAFCOM:KN

Reuters Ticker SCOM:NR

Share statistics (Price Kes)

Current Price 28-Apr-15 17.20

Rating BUY

Target Price 20.69

Upside Potential 20.29%

Market Capitalisation (Kes Mn) 689,118

52 Week High (Kes) 28-Apr-15 17.50

52 week Low (Kes) 28-Apr-15 11.75

Common Shares Outstanding (Mn) 40,065

Year End 31st March.

EPS (Kes) 0.53

DPS (Kes) 0.47

Trailing Twelve Months P/E 32.45

Trailing Dividend Yield FY13 2.73%

Trailing Twelve Months P/B 5.42

Share Price Performance

3 month 16.00%

6 months 24.00%

12 months 25.00%

YTD 25.00%

Website: www.safaricom.co.ke

95

105

115

125

135

145

SCOM Share Price Performance Vs NSE 20 LTM

NSE 20 SAFCOM


5 | P a g e

SHARE PRICE TRIGGERS Trigger Momentum Rationalization

FY15 Earnings release Positive

Safaricom Ltd is set to announce its FY15 earnings on the 07th May 2015. We

expect to see some heightened activity in the run up to the results release

due to huge anticipation from investors who are expecting good results for

the financial year.

Maturity of the final tranche of its

Corporate Bond in December 2015 Positive

Safaricom is expected to complete its interest and principal repayments for

its second and final tranche of its five year medium term note with maturity

date set for December 2015.This will in tandem trim the financing costs of

the company therefore underpinning growth of the company’s bottom line

translating to more value for shareholders.

Strategic capital expenditure Positive

The telecom operator will be committing KES 39 Billion in 2015 to drive their

recently awarded government security intelligence tender, 4G networks

coverage, fiber roll out, network modernization and upgrade. These

initiatives will give Safaricom first mover competitive advantage and act as

a catapult for future business growth.

Timely Project Delivery Positive

The relocation of the M-Pesa servers from Germany to Kenya which began

24 months ago was recently completed in April 2015 as scheduled. This will

unlock a new era of services and set a positive precedent to both

shareholders and other external business partners that Safaricom’s

management team is well equipped to deliver on set targets in good time.

Shifts in Corporate governance Negative

With Bob Collymore’s term coming to an end in August 2015, it’s still unclear

as to whether his term will be renewed or not. The mobile giant has also

experienced several fall-outs of key management staff over the last two

months hence intensifying the uncertainty around business operations. It’s

however worth mentioning that the company operates under clear

structures and business continuity plans. This keeps the company abreast

with normal operations despite any changes in key personnel hence

reducing any risks that could occur in such an event.

Looming Regulatory risks Negative

Following the enactment of the National Payments Systems (NPS)

regulation in 2013, operators were required to open their networks allowing

cross-network transactions. Safaricom was bound to integrate its

exceptionally versatile infrastructure with other operators which could

potentially dilute its market share as the other companies tap into its agency

network. As more banks offer mobile money integration as well, there are

concerns that the bank regulator may choose to enforce more stringent

rules that will affect all players, Safaricom included.


6 | P a g e

MARCHING ON…Key Drivers Steering Business Growth

Banking on Numbers for Compounded Growth:

Safaricom controls lion’s share in all

market segments

Safaricom subscribers grow at an

average of 7% y-o-y

Safaricom has continued to defend its turf by maintaining its market leadership

position in Kenya’s telecommunications industry. According to the Communication

Authority of Kenya (CA), Safaricom controls the majority share in all market segments;

Voice - 75.6%, SMS - 93.0%, Mobile data - 70.0% and Mobile money - 66.7%. This has been

spurred further by investments made by the Telco giant towards achieving the “Best

Network in Kenya status” leading to a 16.40% growth in revenues (FY14) from a 12.83%

revenue growth registered in 2012. As a result of its formidable grip on the market,

Safaricom is the go-to partner especially on the continuously evolving mobile money

space, expanding capacity for revenue generation under the M-Pesa business line (KES

36.65 Billion - FY15F).

Subscriber Growth: Mobile Penetration grows by 2.1% to perch at 82.6% from 80.5%

As of December 2014, mobile subscriptions had risen to 33.6 Million from 32.8 million

reported in the previous quarter whilst the new subscriptions increased to 863,803 up

from 522,435. Safaricom reported a 12.4% increase in mobile subscriptions from 10.5

Million to 11.8 Million. This will continue being supported by higher economic growth

(FY15F GDP Growth 6%, FY14A GDP growth was at 5.3%). Higher income levels have also

bolstered subscriber growth. Rural areas still hold potential due to low tele-density,

therefore as Safaricom continues improving their infrastructure, we shall see more

customers subscribing onto the network. Use of multiple SIM cards in both rural and

urban areas due to availability and affordability of multi SIM card phones has also

spurred the rise in number of subscribers.

Subscribers by Operator (Dec 2013 – Dec 2014) Direct Correlation of Revenue Earned and Subscriber Growth


Source: Communication Authority of Kenya, company filings

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

TotalSubscriptions

SafaricomSubscribers

AirtelSubscribers

OrangeSubscribers

YuSubscribers

No

. of

Sub

scri

ber

s in

Mili

ion

s

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14


7 | P a g e

Rolled out 4G service wins Safaricom

Key government contracts such as

Security tender

Blossoming Data flower: Primary Drivers for Revenue Growth in 2015 and beyond

With the ever-increasing internet penetration within the continent and more so in

Kenya, reported to be at 64.3% in December 2014 from 57.1% in September 2014, there

exists a huge growth potential for Safaricom in the data space. According to CA, the

estimated number of internet users during 4Q 2014 shored up to 26.1 Million up from

23.2 Million. The mobile data revenue line for Safaricom grew exponentially by 40.6%

as a result of growth in their 30-day mobile data customer base to 9.6 Million. Evolution

of advanced services such as e-government, e-commerce, e-learning and Internet

Protocol Television has led to increased demand for data services. Safaricom invested

KES 27.8 Billion in improving the quality, capacity and coverage of their network which

resulted in 91% coverage of the population via 2G and 61% via 3G. This is portended to

translate into a significantly enhanced customer experience in voice, mobile and fixed

data as well as value added services. Therefore, we expect to see more growth in

market share control from the current 67% to a target range of 69 - 71% within the next

three years.

Underlying factors catalyzing robust data growth include: 1.) the rapid increase in the

number of 3G devices on the network to 3.1 Million, of which 1.9 Million are smart

phones 2.) First mover competitive advantage through the launch of its LTE Advanced

(4G) proposition - Safaricom initially rolled out the 4G service in Nairobi and Mombasa

before scaling up coverage in other major towns once the spectrum has completed the

test run. Safaricom contracted Nokia networks to develop the LTE-Advanced network

while sharing capacity on its LTE infrastructure. This is bound to spur data revenue

growth to KES19.97 Billion, 11% contribution and is likely to see the telecom operator

boast of a more superior network position in the country in comparison to other

telecom providers.

Other projects that the company has spearheaded in a bid to democratize data include

the launch of Wi-Fi network in selected malls within the major cities and introduction

of Vuma online which is a Wi-Fi service provided in Public Service Vehicles.

Safaricom Revenue Contribution (Data & M-Pesa) Mobile Data Subscription By Operator

Source: Company filings


-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

TotalSubscriptions

SafaricomSubscribers

AirtelSubscribers

OrangeSubscribers

YuSubscribers

No.

of S

ubsc

ribe

rs in

Mili

ions

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

0.00

20.00

40.00

60.00

80.00

100.00

Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

Mobile vs Internet Penetration in Kenya

Mobile Penetration Rate % Internet Penetration Rate %

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

FY11A FY12A FY13A FY14A FY15F FY16F

Data Revenues MPESA Revenues Total Revenues


8 | P a g e

Safaricom’s versatile abilities

encourage strategic partnerships and

innovation

M-Pesa agency footprint expanded to

85,000 as at December 2014

Leveraging on Strategic Partnerships and Innovations:

Telecom operators have always had an upper hand in integrating their services with

other service providers due to their versatility. Over the years, the telecom giant has

managed to tap into this opportunity by partnering with banks, insurance companies,

and property managers among others with an aim to grow their revenues mainly from

the M-Pesa segment. In March 2015, Safaricom applied for a digital broadcasting license

with an aim to take advantage of the convergence coming with digital TV migration.

This is portended to deepen its presence in the wireless internet market. CA approved

Safaricom’s set-top box giving it an advantage in capturing the emerging home internet

market. This will be used to deliver wireless internet services to households hence we

anticipate growth in data contribution to revenue once the set-top boxes are delivered

in the Kenyan market. Safaricom management disclosed that the boxes are expected

in the country from May 2015 and the boxes will be sold initially at a discounted price

of USD 55, below the USD 105 purchase price with an aim of encouraging more people

to own the set-top boxes.

The firm also won a lucrative contract from the Ministry of Agriculture to develop an

electronic subsidy management system to be used for distribution of fertilizer to

farmers. The digital system is expected to be both mobile phone and web-based

incorporated with the databases of targeted farmers and agro traders. This is

anticipated to steer growth in both M-pesa and SMS revenues. The telco also stands to

earn tens of millions from M-Pesa transactions and SMS charges from the use of this

platform. This could be attributed to the government’s niche in the fertilizer business

which accounts for approximately 90% of the distribution network. The government

has recently added to its offering, fertilizer subsidies for maize, tea, coffee and

sugarcane farmers.

Safaricom Steering the Drive towards a Cash-lite Economy…over 75% of the

population account for financial inclusion.

The financial world landscape is shifting focus from traditional plastic card payments to

“Tap and Pay” payments. Safaricom has remained on the fore front in steering this

initiative. MPESA which was officially launched in 2007 has progressed to be the

dominant payment platform in Kenya. The MPESA agent footprint expanded by 23.6%

to 85,000. Over the seven years of operation MPESA has evolved from just a money

transfer service to a robust payment platform and a key driver towards financial

inclusion in Kenya. Relocation of M-Pesa servers from Germany to Kenya was just

completed in the month of April 2015 with the users anticipating a more reliable system.

The local hosting is also expected to save costs for Safaricom, which will now be in

charge of maintaining the system as opposed to paying fees to Vodafone for the same

maintenance. Many payment services have been integrated into the platform including

Lipa na M-PESA, M-Shwari, Bank–to-MPESA, Lipa Kodi, salary disbursements, utility

payments, airtime purchases and cashless distribution for FMCG companies.


9 | P a g e

Update on M-Pesa Integration… Initiative Sector Progress

Lipa na M-Pesa

Retail

Revamped in June 2013, the primary tool for merchant payment has grown the

merchant base to more than 139,600 as at 30th September 2014. The company is

geared towards growing an active merchant base and making it the preferred

electronic payment platform.

M-Shwari

Banking

Launched in November 2012 as a savings account offered in partnership with

CBA for Safaricom M-PESA customers recently signed up its 10th million customer

making CBA the largest lender by customer base. In the month of March 2015,

KCB in partnership with Safaricom unveiled KCB M-Pesa, which will give

subscribers of the telecoms mobile money platform access to loans of between

KES 50-KES 1 Million repayable between one and six months. This is expected to

intensify the battle for mobile banking with other lenders. So far, the platform

has signed up slightly over 1 million new clients through the platform who were

non clients previously.

Bank to M-Pesa Salary Disbursements

Banking

Approximately 30/43 banks (70%) and 160 financial partners are on board, with

the customers able to conduct mobile banking transactions instantly from their

phones. This has continued supporting financial inclusion by widening

distribution of formal banking services to reach rural areas who could not access

banking facilities before, hence mobilizing deposits from the ever rising

population.

Lipa Kodi

Real Estate

Launched in August 2013, the platform has been offering convenience and cost

efficiency to tenants, landlords and housing agents where they can easily

monitor and access statements of rental payments for record keeping purposes.

As at March 2014, 88 housing agents with more than 60,000 housing units were

on board and the company is continuing to grow its reach in most of the urban

areas.

M-Pesa international money transfer (M-Pesa IMT)

International money transfer

In December 2014, Safaricom was awarded a cash remittance operating license

which would enable the telecom operator to transfer money out of the country

and open new markets for its popular mobile money transfer service. So far, the

service has stretched out to bring seven additional partners with the subscribers

able to receive funds from over 100 countries at no fee. Vodafone and MTN, two

of the largest mobile money providers in Africa, announced plans to

interconnect their services in seven East African countries. The partnership will

allow M-Pesa and MTN Mobile Money customers to transfer money to each

other using their mobile devices in Kenya, the Democratic Republic of the Congo,

Mozambique, Rwanda, Tanzania, Uganda and Zambia.

Cashless FMCG distributions

Retail

To date, the distributors stand at 158 with a total of 1,294 tills driving KES 2.8

Billion in volumes per month. The distribution network is currently being used by

customers such as Coca cola, Unilever, EABL, BAT, Nation Media, Standard

Group and the oil marketers.

http://www.vodafone.com/content/index/media/vodafone-group-releases/2015/m-pesa-mtn.html


10 | P a g e

High trading multiples in comparison

to industry peers

Cutthroat competition threats from

MVNOs

Enactment of the NPS- a big

disruption to business operations

SHOTS TO THE THRIVING BUSINESS:

High trading multiples counter the stock’s intrinsic valuation...

A comparative analysis of the emerging markets’ telecom companies revealed that the

stock is trading in very high multiples. Key pricing multiples; enterprise multiple

(EV/EBITDA) at 12.02x, earnings multiple (P/E) at 22.00x and the P/B multiple at 5.14x

exceed the industry averages of 6.11x, 14.25x, and 2.86x respectively. This poses a risk

of downward price adjustment if the stock is to re-rate going by the price multiples.

The company is however poised to mitigate this by harnessing from operation

efficiencies which will improve the EBITDA and ROA margins while continuing to give

their shareholders value for their capital by sustaining growth as well as superior ROE

of 36.04%.

Stiff Competition Poses a Big Peril to the Telecom…

Telecommunication industry has continued facing enhanced competition due to the

innovative and transformative nature of the industry. So far MVNO licenses have

already been issued to three players (Finserve Africa (Equitel), Mobile Pay (Tangaza),

Zioncell Kenya) which are being hosted on Airtel’s network. Potentially new

competition is expected to arise in the financial services, voice and SMS areas as they

all scramble for the pie. Instant messaging and voice services from Google hang outs

and Whatsapp have also played part in stirring the pot. This poses as a big challenge

especially to a company which has predominantly relied on voice and SMS services to

generate the bulk of its revenues. Safaricom has tackled this by creating SMS bundled

offerings and data bundled offerings such as chattitude. This will aid in securing their

revenues from the respective segments as they continue growing revenues generated

from data and M-Pesa lines. The telco giant is also anticipated to curb competition by

expanding its M-Pesa agency network and partnerships whilst also leveraging on

existing strengths such as brand, customer base and its existing product offering.

Disruptive Regulation: Enactment of the National Payments Systems (NPS) in August

2014…

Following the renewal of their operating license for a further 10 years from 1st July 2014

to 30th June 2024 at a renewal fee of USD 27 Million, Safaricom agreed to conduct

transactions across networks which enhances system operability. This was in a bid to

address Safaricom’s market dominance by requiring all electronic-money issuers in the

country to have open backend systems capable of becoming interoperable both

domestically and internationally. The legislation also encourages providers to enter

into interoperable arrangements with each other. This positions the company at a risk

of facing dilution in the market share while the other players increase their share

following its opening up of its agency network to rivals. However this move is expected

to safeguard against the systemic risk that would arise during business operations.


11 | P a g e

Stab in the dark over CEO’s term

expiry

Revenue erosion over VAT and Excise

duty impositions

Fuelled Speculation on Expiry of Bob Collymore’s Term in August 2015 Coupled With

Numerous Staff Exits;

The current CEO’s term is set to be ending in August 2015 after serving the company

since 2009 following the replacement of Michael Joseph. It is not clear as to whether

his term will be extended or not but we hold that the company is not poised to suffer

from any setbacks in the event of his term expiry since the company has clear

structures in place for business continuity as compared to other growth firms which

face predicaments in case of change in management. The firm has also faced a number

of management staff exits (four) and board replacements in the recent past which have

triggered speculation of a possible management fallout or a quiet executive shake-up

in the region’s biggest and most profitable company.

VAT Imposition and Excise Duty Continue Diluting Disposable Incomes and

Transactional Volumes…

Following changes in the VAT regime in 2013 with a 16% VAT charge on goods & services

and a 10% excise duty levy, the government has continued attracting a growth of more

than 20% in tax revenues against an average economic growth of 5%. This has hampered

growth in the mobile industry on the back of a decline in service usage as average

disposable income levels continue to be eroded. The 10% excise duty passed on money

transfers led to a rise in transfer fees on mobile money services. Any possibility of a

further increase could be a bottleneck to the company’s M-Pesa revenue projections.

However, Safaricom has continued revamping its alternative platforms such as Lipa na

M-Pesa in order to mitigate this risk by spreading transaction charges between vendors

and consumers.

CA vicious war on

Safaricom’ dominant position

Fresh wars on Safaricom’s Dominant Player position: Safaricom Ltd has been facing a vicious

war from their regulator (CA) who are seeking a fresh legal muscle to investigate abuse of

dominance in the telecoms and broadcasting market in the event that the proposed set of 11

regulations come into effect in Mid-June 2015. This poses a risk to telecom operator in the

event that this regulations are passed into law (Safaricom currently has 67% market share)

Since they would be apprehended for abuse of their position due to their current on-net and

off-net tariffs among other indicators. Competition Authority has however strongly supported

the company refuting the claims that Safaricom has been abusing its position.


12 | P a g e

Growth in voice revenue on the back

of superior network service and

convenient airtime distribution

Flat projections for SMS-ARPU

Data- Key revenue pillar going

forward

FINANCIAL PERFORMANCE:

FY14 revenues shored up by 16.4% from KES 124.28 Billion to KES 144.67 Billion following

impressive growth in all segments. Total revenues recorded a steady rise with a 5-year

CAGR of 15.47%. We project a growth in revenues for FY15 to KES 173.74 Billion which

will be bolstered by an increase in customer numbers to 23 Million by the end of

December 2015, as well as increased mobile penetration and more innovations and

partnerships in the M-Pesa segment.

Voice revenue remains the key contributor to the total income, contributing 60% of

total revenue at KES 86.30 Billion and representing a 12% growth in FY14…

Voice revenue has continued to grow at an average rate of 7% y-o-y which has mainly

been supported by the reduction in the MTR (currently at KES 0.99) and a loyal

customer base. We project a flat growth of 9.50% in revenues to KES 94.50 Billion for

FY14/FY15 up from KES 86.29 Billion with the segment contributing 54% to the total

revenues. This is on account of a superior network experience, convenient airtime

distribution and attractive customer propositions & promotions. There was a 34%

increase in airtime top ups done directly through M-Pesa and a 36% increase in

emergency top-ups. Voice revenue growth in the next financial years will also be

buoyed by the growing SME’s and corporates hence creating need for voice services to

run the business. However this may be hampered by a growing appetite for data use

to make calls such as the Whatsapp messaging service which already has a support

function for voice calls as well as Viber.

FY14 SMS revenues surge 34% higher to KES 13.62Billion following a 21% rise in SMS-

ARPU. SMS ARPU improved from KES 52 to KES 63 representing a 21% rise spurred by

increased customer usage driven by affordable SMS bundles (66% growth in SMS

bundle revenue to KES 2.5 Billion) and SMS based promotion such as “Bonyeza

Ushinde.” We project an ARPU of KES 69 and a 17% growth in FY15 SMS revenues to

KES 15.93 Billion translating to a flat rate contribution of 9% in total revenues similar to

FY14. The flat projections are based on lower expectation of customer usage of SMS

due to the various instant messaging services such as Google hang outs and Whatsapp

that have attracted majority of the mobile users. However, Safaricom could catalyze

this by creating SMS bundled offerings and data bundled offerings in order to retain

their SMS clientele.

Mobile and fixed data revenues recorded a 41% and 22% rise to KES 9.3 Billion and KES

2.6 Billion in FY14. This was on the back of 34% increase in 30-day active mobile data

customers to 9.6 Million which accounts for 44% of the total customer base. 3.1 Million

Customers are on 3G enabled devices of whom 1.9 Million are on smartphones hence

driving the data revenue growth. The fixed data growth was buoyed by a 4% growth in

fixed data customers and a 16% increase in fixed service ARPU. We project a 68%

growth in data revenue to KES 19.97 Billion which will be bolstered by the recent

launch of the 4G network coverage which is being incorporated in Nairobi and


13 | P a g e

Partnerships to bolster growth in M-

Pesa revenues

Sturdy EBITDA margins underpinned

by efficient working capital

management and improved cost

efficiencies

Mombasa in the first phase following availability of the spectrum in addition to the 2G

and 3G capacity growth (currently 91% of the populace is covered by 2G network whilst

61% is covered by 3G network). Increased smart phones through cost effective quality

offers will also steer the revenue growth. Data segment is set to be the next growth

frontier for Safaricom as more CaPex initiatives are inclined towards democratizing

data.

MPESA has exhibited eccentric growth with a five year CAGR of 28.57% from revenues

of KES 7.56 Billion in FY10 to KES 26.56 Billion in FY14. The segment’s contribution to

total revenues has however remained at a constant level of 18% supported by the

various strategies being executed by the company which have increased the revenues

and the 23.6% hike in number of agents to 85,000 as at December 2014. M-Pesa segment

is however facing competition from the various MVNO’s which have already been

licensed in the Kenyan market but we are optimistic that the initiatives that the

company has put in place to curb dilution of M-Pesa revenues will bolster further

growth in the segment’s contribution to topline. We project a 38% spike in revenues to

KES 36.65 Billion up from KES 26.56 Billion which will be driven by increased

transactions conducted through the platforms (M-Pesa, Lipa na M-Pesa, KCB M-Pesa,

M-Shwari).

Robust EBITDA margins at 39.68% (FY14) up from 38.58% (FY13) reinforced by cost

savings realized. Higher margins were supported by a 16.4% growth in revenues to KES

144.67 Billion (FY14) whilst containing the overall costs growth at 11.6%. This translated

to an improved bottom line depicted by a 30.35% growth in net income. FY14 EPS stood

at KES 0.53 representing a 30.13% growth on the back of increased revenues, efficient

working capital management and improved cost efficiencies. Free cash flows are

projected to be in the range of KES 25 Billion and KES 26.5 Billion for FY15 as the telecom

engages in capital intensive projects such as the security contract, completion of the

company headquarters in Thika as well as the 4G network coverage. The company will

however bear reduced financing costs on the basis of maturing debt agreements with

the final tranche of the medium term note expected to mature in December 2015. We

estimate a FY15 EPS of KES 0.88 for the period ended 31st March 2015, representing a

66.30% growth.


14 | P a g e

RATIO ANALYSIS:

Year End -31st March - KES (000s) FY12A FY13A FY14A FY15F FY16F FY17F

Number of shares 40,000,000 40,000,000 40,065,428 40,065,428 40,065,428 40,065,428

Share price 3.05 13.55 11.70 20.69 21.72 22.81

Growth

Turnover Growth 12.83% 16.16% 16.40% 18.99% 17.62% 13.94%

Voice Revenue 8.60% 12.15% 11.58% 9.50% 5.78% 5.78%

SMS Revenue 3.05% 30.60% 34.22% 16.95% 12.97% 12.97%

Data Revenue 22.72% 32.37% 36.24% 68.00% 56.00% 32.00%

MPESA Revenue 43.21% 29.46% 21.62% 32.00% 32.00% 21.00%

Other Revenues 2.46% -8.36% 1.21% 6.00% 6.00% 6.00%

Operating profit growth 7.79% 4.00% 68.65% 11.41% 17.62% 13.94%

EBITDA growth 6.64% 25.88% 19.70% 35.17% 17.59% 13.92%

PAT growth -4.29% 39.08% 30.35% 64.10% 25.08% 17.46%

Total assets growth 7.07% 5.71% 4.46% 2.94% 6.95% 10.69%

% Contribution to Total Revenue

Voice Revenue 64.45% 62.23% 59.65% 54.89% 49.37% 45.83%

SMS Revenue 7.26% 8.16% 9.41% 9.25% 8.89% 8.81%

Data Revenue 6.16% 7.02% 8.21% 11.60% 15.38% 17.82%

MPESA Revenue 15.77% 17.57% 18.36% 20.37% 22.86% 24.27%

Other Revenues 6.36% 5.02% 4.36% 3.89% 3.50% 3.26%

Profitability

GP margin 49.40% 44.23% 64.08% 60.00% 60.00% 60.00%

Depreciation/Turnover (%) 16.77% 16.78% 15.38% 15.93% 14.32% 13.52%

Tax Rate (%) 28.75% 32.61% 35.97% 30.00% 30.00% 30.00%

Net Income Margin 10.98% 13.15% 14.73% 20.31% 21.60% 22.27%

ROE 16.31% 20.37% 23.35% 35.60% 40.88% 43.81%

ROA 9.64% 12.69% 15.83% 25.23% 29.51% 31.32%

Efficiency

Total Asset Turnover 0.88x 0.96x 1.07x 1.24x 1.37x 1.41x

Fixed Asset turnover 1.06x 1.20x 1.36x 1.45x 1.63x 1.75x

Inventory Turnover 20.41x 31.02x 17.58x 24.33x 24.33x 24.33x

Receivables Turnover 13.06x 15.30x 18.68x 18.25x 18.25x 18.25x

Payables Turnover 1.78x 2.49x 1.76x 2.03x 2.03x 2.03x

Working Capital Turnover -6.52x -11.06x -14.55x -11.38x

Leverage

Debt to EBIDTA 0.50x 0.42x 0.21x 0.06x 0.00x 0.00x

Debt to Total Assets(%) 15.68% 15.70% 8.92% 3.24% 0.00% 0.00%

Liquidity

Current Ratio 0.56x 0.69x 0.74x 0.57x 0.59x 0.69x

Quick Ratio 0.49x 0.63x 0.66x 0.49x 0.51x 0.61x

Cash Ratio 0.23x 0.41x 0.46x 0.22x 0.24x 0.34x

Operating Cash Flow/Current Liabilities 0.88x 1.07x 1.29x 1.85x 1.86x 1.84x

Operating Cash Flow/Sales 0.31x 0.31x 0.34x 0.38x 0.38x 0.37x

Operating Cash Flow/Total Liabilities 0.27x 0.30x 1.14x 1.62x 1.86x 1.84x

Operating Cash Flow/CAPEX 1.32x 1.58x 1.78x 1.65x 2.22x 2.20x

Operating Cash Flow/CAPEX+Dividends 0.98x 1.05x 1.06x 1.09x 1.12x 1.12x

Operating Cash Flow/Dividends 3.78x 3.16x 2.63x 3.17x 2.27x 2.30x

FCF/Operating Cash Flow 16.97% 26.50% 43.90% 39.37% 55.04%

Per share data

EPS 0.29 0.41 0.53 0.87 1.09 1.28

DPS 0.22 0.31 0.47 0.51 0.84 0.94

BVPS 1.80 2.01 2.28 2.45 2.67 2.93

Sales per share 2.67 3.11 3.61 4.30 5.05 5.76

Valuation Multiples

EV/EBITDA(x) 3.47x 11.41x 8.07x 10.64x 9.43x 8.64x

EV/Sales(x) 1.24x 4.40x 3.20x 4.80x 4.25x 3.89x

P/E(X) 10.38x 33.16x 22.00x 23.71x 19.90x 17.79x

P/BV(X) 1.69x 6.75x 5.14x 8.44x 8.14x 7.79x

Price to Sales 1.14x 4.36x 3.24x 4.82x 4.30x 3.96x


15 | P a g e

DISCOUNTED CASH FLOW VALUATION SUMMARY

We arrived at a DCF derived fair value of KES 20.69 using a beta of 1.19 and a risk free rate of 11.41%. We used a long term

growth rate assumption of 12.7% arrived at using an average of both the topline and bottom line CAGRs, a market risk

premium of 5% and a WACC of 17.2% pegged on a cost of equity of 17.4% and an after tax cost of debt of 1.9% (the company

is majorly cash-based with a very little debt proportion). This returns an upside potential of 20.29% on current market

price levels hence indicative of potential price appreciation.

DCF Valuation KES (000s) FY14A FY15F FY16F FY17F FY18F Terminal valueUnlevered Net Income 23,189,177.0 35,660,760.6 44,092,888.1 51,435,212.0 60,182,448.2+Depreciation 22,245,035.0 27,461,044.7 29,094,103.4 31,336,304.6 34,314,838.7

-Capital Expenditure 27,734,998.0 39,959,183.5 34,777,923.4 39,651,062.8 45,541,727.1-Change in NWC 1,293,886.0 (3,124,967.0) (3,886,740.3) (3,612,641.6) (4,366,971.2)

Free Cash Flows 16,405,328.0 26,287,588.9 42,295,808.5 46,733,095.4 53,322,531.0 1,321,760,628.12 Discount Period - 1.00 2.00 3.00 4.00 Discount Factor 1.00 0.85 0.73 0.62 0.53 0.53

Present Value of FCFF 16,405,328.00 22,420,778.39 30,767,853.20 28,995,082.18 28,216,976.92 699,443,339.55

Enterprise value 826,249,358.2

Debt 5,102,380.0 Cash (7,819,553.5)

Net Debt (2,717,173.5) Implied equity value 828,966,531.7

Number of shares 40,065,428.0Fair value 20.69

Assumptions

Risk Free rate 11.41%Market Risk Premium 5.0%

Long Term Growth Rate Assumption 12.7%Cost of debt 2.7%

Weight 0.7%Beta 1.19

Cost of Equity 17.4%

Weight 99.3%Tax Rate 30.0%

After Tax Cost of Debt 1.9%WACC 17.2%

20.69 9.7% 10.7% 11.7% 12.7% 13.7% 14.7% 15.7%

14.2% 22.50 28.18 38.39 62.22 181.36 -176.08 -56.93

15.2% 18.43 21.95 27.48 37.43 60.64 176.71 -171.50

16.2% 15.62 17.99 21.42 26.80 36.50 59.12 172.22

17.2% 13.55 15.25 17.56 20.90 26.15 35.60 57.64

18.2% 11.98 13.24 14.89 17.15 20.40 25.52 34.73

19.2% 10.73 11.70 12.94 14.55 16.75 19.92 24.91

20.2% 9.72 10.49 11.44 12.64 14.22 16.36 19.46

WA

CC

Terminal Growth Rate


16 | P a g e

RELATIVE VALUATION:

EV/EBIDTA Valuation (Kes '000's) EV/ EBIDTA 6.11xEBIDTA 92,186,340.88 Implied Enterprise Value 562,848,825.73 +Debt 12,000,000.00 -Cash (17,618,884.00) Net Debt (5,618,884.00) Implied Equity Value 568,467,709.73 No. of Shareholders 40,065,428.00 Fair value 14.19

P/E Valuation (Kes Mn) Market Price 16.60 Trailing EPS 0.53 Forecasted EPS 0.88 Industry P/E 14.25xFair Value 12.60

P/B Valuation (Kes Mn)Shareholders's Equity 91,235,979.00 Industry P/B Multiple 2.86xForecasted BVPS 2.45

Implied price per share 7.02

Valuation Method Implied ValueDCF 20.69EV/EBITDA 14.19P/E 12.60P/B 7.02Average 15.83

EV/EBITDA Valuation Summary:

We applied an enterprise multiple technique which yielded a fair

value estimate of KES 14.19 based on an average EV/EBITDA multiple

of 6.11x. We focused on a sample of 9 companies within emerging

markets that we felt operate in a similar business environment to

that of Safaricom and are within the same market capitalization

range. The method was favorable since it takes account of the debt

component which the P/E multiple ignores.

P/E valuation summary:

The earnings multiple gave a target price of KES 12.60 based on a

forward EPS of KES 0.88 for FY15. The relatively fair value estimate

was based on the consistent earnings growth that the company has

been posting. This is an addition to Safaricom’s minimal gearing that

makes it susceptible to volatility of earnings.

P/B valuation summary:

Our P/B valuation resulted into the lowest target price of KES 7.02.

This could potentially have resulted from the fact that most of the

telecom companies have less tangible assets and more intangible

assets hence resulting in a lower industry multiple. Again, Safaricom

owns intellectual property which makes it difficult to assess in terms

of value hence resulting in a lower target price under this valuation

method.


17 | P a g e

FOOTBALL FIELD

Source: Genghis Research

The above football field displays an average target price range for the different valuation techniques applied. For our fair

value estimate we used the DCF valuation arriving at KES 20.69. This was on account of the telecom being more cash

based in addition to the company’s consistent earnings growth. The relative valuation however resulted in slightly

skewed price estimates since the company trades in very high multiples compared to the other peers from within

emerging markets.

The following assumptions for FY15 form the basis for our valuation;

Revenues are estimated to grow by 20.09% to KES 173.74 Billion largely driven by improved contribution from M-pesa and

data segments. We estimate that M-Pesa revenues will grow by 21% from the previous 18% as a result of more partnerships

and increase in M-Pesa outlets and Lipa na M- pesa merchant base. Data revenue is projected to grow at 11% from 8% as

Safaricom continues with the initiative of expanding their fiber roll out to reach more people in the rural areas. We

however opine a decline in voice revenues from 60% to 54% as the subscribers’ transit from voice to non-voice

communication streams.

EBITDA margin is portended to improve to 45.07% (FY15F) up from 39.68% (FY14A) on the back of cost containment

initiatives (transmission costs, network operating costs and IT operational costs) and robust revenue growth on data and

M-pesa segments.

EPS is projected to improve to KES 0.88 in FY15 up from KES 0.53 in FY14. The dividend policy payout is set to be trimmed

from 85% to 80% of the free cash flows hence this results to a DPS of KES 0.52 (FY15F) up from KES 0.47 (FY14A).

Our valuation is also based on a free cash flow guidance of KES 25-26.5 Billion for FY15 as provided by the management

(FY15F- KES 26.06 Billion).

Capex for FY15F is projected to stand at KES 39.96 Billion from KES 27.73 Billion (FY14A) based on the award of the security

tender from the government and completion of their headquarters in Thika while depreciation charge is estimated to be

KES 27.46 Billion (FY15F) from KES 22.25 Billion (FY14A).

5.26

5.52

2.21

12.06

11.70

16.92

16.03

25.69

Price toEarnings

TEV/EBITDA

Price to Book

DCF

Target Price: 20.69/share


18 | P a g e

FINANCIAL STATEMENTS SUMMARY

KES in '000's, unless stated otherwise FY13A FY14A FY15F FY16F FY17F FY18F

Income Statement

Revenue 124,283,824.00 144,672,477.00 173,735,580.52 204,576,019.73 233,241,545.68 267,892,512.46

Cost of Sales -69,312,896.00 -51,963,714.00 -69,494,232.21 -81,830,407.89 -93,296,618.27 -107,157,004.98

Gross Profit 54,970,928.00 92,708,763.00 104,241,348.31 122,745,611.84 139,944,927.41 160,735,507.47

Other Income 197,888.00 126,625.00 126,878.25 127,132.01 127,386.27 127,641.04

Finance Income 1,199,298.00 1,695,412.00 1,737,355.81 2,045,760.20 2,332,415.46 2,678,925.12

Selling, General& Admin Expenses -7,214,398.00 -35,434,286.00 -26,060,337.08 -30,686,402.96 -34,986,231.85 -40,183,876.87

EBITDA 47,954,418.00 57,401,102.00 78,307,889.48 92,186,340.88 105,086,081.83 120,679,271.65

Depreciation and Amortisation -20,858,256.00 -22,245,035.00 -27,461,044.75 -29,094,103.44 -31,336,304.57 -34,314,838.73

EBIT 27,096,162.00 35,156,067.00 50,846,844.74 63,092,237.44 73,749,777.26 86,364,432.92

Interest Expense -2,839,249.00 -1,882,358.00 -226,564.40 238,926.97 632,106.87 908,849.46

Tax Expense -7,910,755.00 -11,966,890.00 -15,186,084.10 -18,999,349.32 -22,314,565.24 -26,181,984.71

PAT 16,346,158.00 21,306,819.00 35,434,196.23 44,331,815.09 52,067,318.89 61,091,297.66

Balance Sheet

Inventories 2,234,294.00 2,955,967.00 2,855,927.35 3,362,893.47 3,834,107.60 4,403,712.53

Accounts Receivables 8,124,808.00 7,746,617.00 9,519,757.84 11,209,644.92 12,780,358.67 14,679,041.78

Cash 14,996,922.00 17,618,884.00 7,819,553.50 9,786,460.89 15,497,814.09 20,856,164.40

Other Current Assets 0.00 0.00 0.00 0.00 0.00 0.00

Total Current Assets 25,356,024.00 28,321,468.00 20,195,238.68 24,358,999.28 32,112,280.36 39,938,918.71

PPE 95,296,398.00 97,710,542.00 110,208,680.77 115,892,500.68 124,207,258.88 135,434,147.27

Intangibles 1,641,162.00 945,573.00 945,573.00 945,573.00 945,573.00 945,573.00

Other Fixed Assets 6,562,573.00 7,623,363.00 7,623,363.00 7,623,363.00 7,623,363.00 7,623,363.00

Total Fixed Assets 103,500,133.00 106,279,478.00 118,777,616.77 124,461,436.68 132,776,194.88 144,003,083.27

Total Assets 128,856,157.00 134,600,946.00 138,972,855.46 148,820,435.96 164,888,475.25 183,942,001.98

Payables 27,825,322.00 29,473,060.00 34,271,128.21 40,354,721.70 46,009,291.20 52,844,550.40

Others 537,749.00 1,276,527.00 1,276,529.00 1,276,533.00 1,276,539.00 1,276,547.00

Overdraft/Borrowings (Corporate Bond) 8,227,958.00 7,513,000.00 0.00 0.00 0.00 0.00

Total Current liablities 36,591,029.00 38,262,587.00 35,547,657.21 41,631,254.70 47,285,830.20 54,121,097.40

Bank Loan (Corporate Bond) 12,000,000.00 4,487,000.00 4,487,000.00 0.00 0.00 0.00

New Term Loan (CFC Loan) 0.00 615,380.00 615,380.00 0.00 0.00 0.00

Other liabilties 0.00 0.00 0.00 0.00 0.00 0.00

Total Long Term Liabilties 12,000,000.00 5,102,380.00 5,102,380.00 0.00 0.00 0.00

Shareholders Equity 80,265,128.00 91,235,979.00 98,322,818.25 107,189,181.26 117,602,645.04 129,820,904.58

Total Shareholders equities and liabilities 128,856,157.00 134,600,946.00 138,972,855.46 148,820,435.96 164,888,475.25 183,942,001.98

Cash Flow Statement

Operating Cash Flows 39,130,745.00 49,437,777.00 66,020,208.00 77,312,658.82 87,016,265.09 99,773,107.55

Investing Cash Flows (25,361,304.00) (27,734,998.00) (39,959,182.52) (34,777,921.35) (39,651,059.77) (45,541,723.12)

Financing Cash Flows (7,580,577.00) (17,045,455.20) (35,860,355.99) (40,567,830.07) (41,653,852.12) (48,873,034.13)

Movement in cash and cash equivalents

Beginning Cash Balance 8,808,058.00 14,996,922.00 17,618,884.00 7,819,553.50 9,786,460.89 15,497,814.09

Net movement in cash 6,188,864.00 (2,048,533.20) (18,241,471.99) (32,748,276.58) (31,867,391.23) (33,375,220.04)

Ending Cash Balance 14,996,922.00 19,654,245.80 7,819,553.50 9,786,460.89 15,497,814.09 20,856,164.40


19 | P a g e

SAFARICOM FACT SHEET:

Shareholding Structure

There were minor changes on the shareholding structure, in the last financial year which increased the total number of shares to 40,065,428,000 from 40,000,000,000. This was brought about by the exercising of some initially granted 65,428,000 options under ESOP which was done by Feb, 2014. This however did not alter the shareholding of both the government and Vodafone.

Source: Company filings

Bull Points Bear Points

Stable Dividend Payout ratio- 80% of free cash flows Well positioned for strategic partnerships and innovations Growth in subscribers expected to be sustained on a high scale. Headroom for growth in data and M-Pesa revenues following

the inception of the 4G infrastructure and upgrade of M-Pesa services.

Strong brand

Stiff competition from MVNOs Dilution prospects following the enactment of the National

Payment Systems High trading multiples creating a possibility for a future

price correction Revenue erosion over VAT and Excise duty impositions


Name of Shareholder # of shares % Shareholding

1 Vodafone Kenya Limited 16,000,000,000 39.93%

2 Cabinet Secretary-The Treasury 14,022,572,580 35.00%

3 Standard Chartered Nominees Non-Resident AC 9835 343,552,231 0.86%



6 Standard Chartered Nominees A/C KE 11916 253,590,700 0.63%

7 Standard Chartered Nominees AC KE 14353 227,000,133 0.57%

8 Standard Chartered Nominees Non-Resident A/C 9318 202,437,740 0.51%

9 Standard Chartered Nominees Non-Resident AC KE 10085 182,542,500 0.46%

10 Standard Chartered Nominees AC 9230 128,560,200 0.32%

11 Others 8,086,079,310 20.18%

Total 40,065,428,000 100.00%

Voice Traffic By Operator(Mins) Oct-Dec 2014

Safaricom Ltd 6,220,069,821

Airtel Networks Ltd 722,080,510

Finserve 1,627,200

Telkom Kenya Ltd (Orange ) 458,602,528

Source: CA

Data Market Share FY14

Safaricom Ltd

Airtel NetworksLtd

Telkom KenyaLtd (Orange)

Safaricom Limited

Business Description

Provision of integrated telecommunication services: mobile

and fixed voice, messaging, data and M-Pesa (a mobile

money service)

Established April 3,1997

Revenues KES 79.3 Billion in HY 2015 (as at September 30,2014)

EBITDA KES 33.5 Billion in HY 2015 (as at September 30, 2014)

Listing Nairobi Securities Exchange

Issued shares 40,065,428,000 shares

Shareholding structure Government of Kenya 35%; Vodafone 40%; Free float 25%

Market Capitalization KES 653.07 Million (USD 7.022 Billion @ USD/ KES 93.00)

Employees 4,214 employees as at September 30,2014

Customer Base 21.85 Million as at September 30,2014

Head officeSafaricom House, Waiyaki Way, Westlands, P.O. Box 66827,

Nairobi.

Source: Company Filings


20 | P a g e

Disclaimer: The content provided on this document is provided as general information and does not constitute advice or recommendation by

Genghis Capital Ltd and should not be relied upon for investment decisions or any other matter and that this document does not constitute a

distribution recommending the purchase or sale of any security or portfolio. Please note that past performance is no indication of future results.

The ideas expressed in the document are solely the opinions of the author at the time of publication and are subject to change without notice.

Although the author has made every effort to provide accurate information at the date of publication all information available in this report is

provided without any express or implied warranty of any kind as to its correctness. You should consult your own independent financial adviser to

obtain professional advice before exercising any decisions based on the information present in this document. Any action that you take as a result

of this information, analysis, or advertisement is ultimately your responsibility.

Genghis Capital Ltd, Delta Corner – PWC Building , Westlands, Nairobi. Tel: +254 20 2774760 Fax: +254 20 246334

safaricom update - unlocking potential in the african telco space

Documents