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Safaricom market value rises past Sh400 billion

Safaricom CEO Bob Collymore. Share price rally pushed Safaricom’s market capitalisation to Sh408 billion November 6, 2013 or equivalent to a fifth of the entire Sh1.9 trillion stock market wealth and more than double the Sh200 billion valuation during its listing 65 months ago. Photo/FILE
Safaricom CEO Bob Collymore. Share price rally pushed Safaricom’s market capitalisation to Sh408 billion November 6, 2013 or equivalent to a fifth of the entire Sh1.9 trillion stock market wealth and more than double the Sh200 billion valuation during its listing 65 months ago. Photo/FILE 

Safaricom shareholders Wednesday had the value of their investment in the telecom firm more than double since they bought shares in the primary market five years ago.

The company’s shares crossed the Sh10 per mark in Wednesday morning trading a day after it announced a 45 per cent rise in after tax profit that analysts said were higher than expected.

The shares traded at a price of Sh10.20 at the Nairobi Securities Exchange (NSE) on expectations of strong annual results.

The share price rally pushed Safaricom’s market capitalisation to Sh408 billion or equivalent to a fifth of the entire Sh1.9 trillion stock market wealth and more than double the Sh200 billion valuation during its listing 65 months ago.

The mid-morning share price rally came after analysts raised dividend expectations to between 43-45 cents a share before it closed the day at an average of Sh9.70.

“We are expecting that the dividend for the whole year to stand at 44 cents a share going by the fact that the company pays out 85 per cent of the free cash flow,” said Kuria Kamau, a research analyst at Kestrel Capital.

Standard Investment Bank (SIB) forecast the dividend payout for the year at a high of 45 cents a share.

Safaricom paid a dividend of 31 cents a share for the year ended in March 2013, and payout of 45 cents would amount to an increase of 14 cents a share or 45 per cent growth. The forecasts are supported by the fact that the Safaricom management has raised the 2014 free cash flow estimate from between Sh15.5 and 17.5 billion to between Sh20 and 21 billion.

Since its listing on the NSE in June 2008, Safaricom has struggled to rise to touch the price of Sh8 a share. It only did so ahead of the announcement of the latest results.

The telecoms operator has had little to show in terms of market performance despite making investments worth more than Sh100 billion in the past five years.

The company has had an equally turbulent net profit growth in the five years since listing – having returned a drop in net income in some years.

The price of Sh10.20 recorded during Wednesday’s morning trading, the worth of government shares stood at Sh143 billion — almost half of the budget deficit for the current financial year.

The deficit stands at Sh330 billion, amounting to 8.1 per cent of the gross domestic product (GDP).

The wealth of other shareholders, including Vodafone and individual investors, also rose considerably to stands at Sh265 billion going by the early morning price.

Retail investors hold 25 per cent of the company’s shares worth Sh105 billion.  Vodafone Kenya, which owns Vodafone Plc’s 40 per cent stake at Safaricom rose to Sh160 billion.

Should Safaricom pay a dividend of 44 cents by the end of this year ending in March 2014, Vodafone would take home at least Sh7 billion besides payments for royalty on MPesa business, while the government would earn about Sh6 billion. Other investors, who in total hold 25 per cent stake, would take home Sh4.5 billion in dividends.

SIB said that Safaricom management had indicated that it could maintain the 41.7 per cent margin of earnings before interest tax depreciation and amortization (EBITDA) for the full year pointing to the firm’s ability to convert sales into profit.

“In our opinion, this [high net profits and free cash flow] points to good dividend payout for next year given the company’s dividend policy is usually around 85 per cent of the free cash flow,” said Old Mutual Securities.

Profitability is also indicated by the profit margins.

Mr Kamau of Kestrel said the major risk to the share lies in the looming cessation of the US five-year bond-buying spree since much of the recent increase in the share price has been driven by foreign investors.

“The major risk lies in fact that the recent price rise has been driven by foreign investors and there is, going forward, a possible reduction in the monetary stimulus in the US,” said Mr Kamau.

Safaricom has traded at all-time lows of Sh2.50 as some investors became pessimistic with the fall in net profits and exited. The same investors are now forced to watch the unfolding events with quite some regret.

The rise in Safaricom’s share price has been so sudden and robust that investors have made not only book or accounting profit, but also economic gains in sense that it has beaten inflation.

Other costs aside and adjusting the price for inflation, the stock breaks even at Sh9.60, which essentially puts investors to be at the same place as they were in June 2008 when the share was listed.

In the past five years, 2008 was the worst year in terms of inflation at 28.2 per cent following post- election conflict and global financial crisis.

At an average price of Sh9.70, the share is marginally above the inflation-adjusted price at the time of listing some five years ago.

But the company’s profitability could receive some knock from next year with a cut in interconnection rates. The interconnection rate is currently Sh1.4 and is set to fall further to Sh1.2 from June 2014 under the plan set by the Communications Commission of Kenya.

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