Analysts project steady Safaricom share run

After close to two years of depressed share price movements, investors in Safaricom finally have a reason to smile.

The listed mobile telephony giant touched a one-year high of Sh5.9 on Thursday in an unprecedented rally that has set the Nairobi Stock Exchange abuzz with hopes of sustained recovery.
But opinion is divided on whether or not Safaricom’s bull run is a steady surge or a mirage of hope that will disappear in the next few months.

An investment note published by international investment bank Morgan Stanley is already whetting the appetites of frontier market investors with a price target of Sh6.40 in the coming months.

The linchpin in Morgan Stanley’s analysis is the slackened onslaught from Safaricom’s main competitors —Zain, Orange Telkom and Yu- in the voice front, the growth in the mobile money transfer service M-pesa and an explosive growth in data revenues.

“We reiterate our Overweight rating, supported by a solid earnings backdrop for the next 12 months; price target increases to Sh6.4,” say analysts at Morgan Stanley in the research note.

Morgan Stanley’s recommendations of course, come with a bold disclaimer, a reminder that the firm was the international book runner for the Safaricom share during the firm’s initial public offering.

With foreign investors having run proceedings at the bourse in 2009, picking off dirt cheap stocks as local investors took to the hills; the Morgan Stanley note couldn’t be timelier.

From a low of Sh2.55 in February last year to a high of Sh5.9, Safaricom which is the most liquid stock in the East Africa region has gained just over 131 per cent on its share price.

Such a share appreciation with the global recession in mind and equity markets tittering on the brink in 2009 make Safaricom gold mine for any investor.

But it also means that as the Safaricom shares gain momentum, the prospect to take profits gradually or exit quickly after attractive price entry points last year are now a stark reality.

The short attraction span of foreign investors in frontier markets is nothing new.

Just days after Safaricom’s debut back in June 2008, foreign investors exited the markets after taking profits of between 30 to 40 per cent, playing a part in the eventual downward spiral of the share.

And as the first signs of trouble in advanced markets began rearing their head, capital flight became the norm with small and relatively illiquid frontier markets bearing the brunt of the foreign investor exit.

“The danger is that when foreign investors stop buying, the stock might fall as it did before,” says Reginald Kadzutu, head of fund management at Amana Capital.

“Foreign investors are still very dominant in the market,” says Edward Gitahi, senior investment manager at AIG Investments.

Market observers say risk aversion is lower compared to the heady days of the global financial crisis, translating in capital chasing higher yields in frontier markets.

But although a potential exit of investors cannot be ruled out, an attraction of higher dividend payments stands as a possible attraction for long term investment positions.

Morgan Stanley analysts estimate that Safaricom’s future cash flows will grow by 60 per cent next year and Safaricom will have net cash of Sh10 cents per share.

According to the analysts, this suggests potential for a higher dividend pay out next year than the current 36 cents dividend per share, a 65 per cent payout ratio.

This will however be put to the test with signs that Safaricom has to raise it capital expenditure to support further revenue growth.

Still, the option of capital gains over a dividend pay out still hold sway with the dividend pay out per share of 10 cents hardly enticing enough to lock foreign investors in.

For investors who had held onto the shares, the rising profile of Safaricom makes a compelling case to gradually exit from the counter.

Still, Safaricom remains one of the most profitable firms in the country and provides an excellent exposure for investors seeking an entry into the region’s telecommunications growth.

The firm’s dominance in Kenya’s mobile telephony market is yet to be seriously challenged with opportunities in voice, data and money transfer segments favouring Safaricom’s early entry into the market.

For market players, whether Safaricom’s steady stride will hold is of crucial importance.
The run could be the elusive trigger that will see the return of retail investors and herald the full recovery of the stock market.

For now, news that Safaricom is on the up and up –whether sustainable or not- remains an encouraging tune for stock market players.
Experience however, still remains the best and sometimes harsh teacher.

Should some predictions turn out to be true and foreign investors exit Safaricom just as retail investors are trickling back to the stock market, another prolonged bear run cannot be written off.