The premium valuation signals increased investor confidence in the telecoms operator’s future prospects, with early shareholders reaping the most compared to those buying at the current price, which some analysts say is expensive.
The telecoms company announced a 19.6 per cent rise in net profit to Sh38.1 billion in the period, beating SIB’s estimates by 3.8 per cent.
Safaricom’s share price hit a new all-time high of Sh20 yesterday, lifting the telecommunications firm’s market value to a record Sh801.3 billion.
The share price rally on the Nairobi Securities Exchange (NSE) is driven by the telecom operator’s announcement on Tuesday last week of a special dividend of Sh0.68 per share, amounting to Sh27.5 billion, payable to shareholders on its register as of September 2.
The latest dividend payment adds to the Sh0.76 per share, amounting to Sh30.4 billion, that Safaricom declared for the year ended March. Both are payable in December.
At the current market price, Safaricom is now valued higher than all the listed banks and beer maker East African Breweries Limited combined.
Safaricom now accounts for 38.4 per cent of the entire stock market valuation in what has raised concerns over its influence on the Nairobi bourse.
Trading in the company’s stock has accounted for 90.7 per cent of the Sh86.2 billion added to the total stock market since Monday last week, to stand at Sh2 trillion.
The company’s premium valuation, which has seen it recover from lows of Sh2.7 per share in early 2009, is underpinned by its large market share in voice, data and financial services.
Investors are rushing to buy the firm’s stock to pocket the total dividend of Sh1.44 per share, which represents a yield of 7.2 per cent based on the current market price.
Safaricom’s decision to pay the extra dividend, which represents an interim payout for the current financial year ending March 2017, came after the firm paid all its debts in the wake of increased cash generation from its operations.
It signals that the company has more cash than it needs to fund its operations, including capital expenditure, which has topped the Sh30 billion mark in recent years.
The positive outlook has further fuelled the share price rally that had already seen Safaricom stand out as one of the few counters on the rise amid the general bear run in the market that has seen other blue-chip stocks plummet by double digits.
Market data shows that buy orders on Safaricom’s stock have surpassed sale orders by over 10 million units in recent days, underlining strong demand for the counter. “Foreign investors turned net sellers of Safaricom (70.7 per cent of market activity) with net outflows at $111,160 compared to net inflows of $1.7 million,” said analysts at Standard Investment Bank in a note to investors.
The premium valuation signals increased investor confidence in the telecoms operator’s future prospects, with early shareholders reaping the most compared to those buying at the current price, which some analysts say is expensive.
Investors who bought into the firm during its 2008 initial public offering (IPO) at Sh5 per share, for instance, have quadrupled their investment and stand to book a dividend yield of 28.8 per cent in December alone.
Those buying now are betting on the continuation of the company’s strong performance in the future, defying advisories by several analysts that place the company’s fair value at less than Sh20 per share.
Fair value
Asset manager Cytonn Investments, for instance, in May advised investors to reduce their holding of the telecoms operator’s stock which was at the time trading at Sh17.3.
“We recommend a lighten for the Safaricom stock with a target price of Sh16.6 representing an upside of 0.2 per cent, from the current price of Sh17.3 as at May 13, 2016, inclusive of a dividend yield of 4.2 per cent,” Cytonn said in the report.
Ahead of Safaricom’s results for the year ended March, Standard Investment Bank (SIB) assigned the company’s share price a fair value of Sh13.94 and advised clients not to take new positions in the stock.
The telecoms company announced a 19.6 per cent rise in net profit to Sh38.1 billion in the period, beating SIB’s estimates by 3.8 per cent.
With the company expected to maintain a dividend payout rate of 80 per cent of profits, continued increase in earnings should see the absolute dividends rise over the years. Safaricom’s return on equity (ROE) currently stands at 32.6 per cent, one of the highest among the blue-chip stocks at the NSE.
The share price rally has, however, narrowed down the prospective returns, with the telecoms operator among the most expensive stocks at a price-to-earnings ratio of 21 times.
At Sh20, the company is valued at 6.8 times its net asset value of Sh2.9 per share or Sh116.7 billion in aggregate.
