Safaricom holds steady as continued investments pay off

The unending rise of Safaricom’s share price from the base of January 2012 has led many people to assume that the stock is overbought in an emotional over-reaction by overly optimistic investors happy that their investment is finally paying off.

In early June investors begun buying into the stock at the fastest pace in four years. The resulting price trend has created an interesting technical chart that has captured the imagination of opportunistic trend followers wanting to cash in on a steady up trend.

Now, it is true that no tree ever grows to the moon but the problem with this bearish mind-set is that it assumes there is a significant change in the telecommunication industry, and that pricing will eventually return to previous levels.

That may be true, but fundamental performance of the company tells a very different story. One trend in particular is the impressive compounded average growth rates (CAGR) in total revenues and free cash flow which stand at 10 per cent and 24 per cent respectively since 2010.

CAGR in EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) has equally remained strong at 7.7 per cent in the same period.

Recent half year results show a steady 14.6 per cent increase in total revenue to Sh79.34 billion led by the voice which contributed Sh43.6 billion at 54.9 per cent of total revenue. Mobile data revenue, which saw the largest increase in revenue, stood at 52.9 per cent to Sh6.5 billion while M-Pesa revenue increased 24.7 per cent to Sh.15.6 billion.

After-tax profit at Sh14.7 billion was up 30.6 per cent compared to the previous season. With these statistics in mind, it is hard to argue that the current price trend has no strong legs to stand on.

READ: M-Pesa, data drive Safaricom half-year profit to Sh14.7bn

The continued re-investments into the business keep investors hanging on. Last year, the company invested Sh25 billion in capital expenditure, up from Sh25.7 billion in 2012 on the back of improvement in voice and data quality, 1,500 fibre connection and the recruitment of Lipa na M-Pesa merchants.

At any other firm this spending might be labelled profligate, but with Safaricom, investors have bought into the idea that the spending is “strategic”. It isn’t hard to imagine why investors are voting with their money.

All they have to do is keep a laser focus on the both the top and bottom line numbers to ensure steady performance is maintained. But if a trend emerges for instance of negative growth in market share which translates to reduced earnings and profitability, and the price up trend remains persistent, then calls for exit will be justified to reflect weaker results.

If not, then perhaps the present trend is strong after all. Traders often like to quip the maxim “the trend is your friend until the end where it bends,” to describe the way prices may tend to drift in one direction and then suddenly change course.

Since this year’s 19 per cent rise of the stock shows no sign of tapering off, patient investors can take advantage of rebounds from oversold conditions to participate in the trend.

Remember never sell a stock when the sap is running up the tree.

Mr Mwanyasi is an investment manager.