Capital Markets

Morgan Stanley sees more headroom for Safaricom share

Safaricom Customer Care Centre on Moi Avenue, Nairobi. Analysts say the company's shareholders could pocket higher dividends starting next year. Photo/File
Safaricom Customer Care Centre on Moi Avenue, Nairobi. Analysts say the company's shareholders could pocket higher dividends starting next year. Photo/File 

International investment bank Morgan Stanley has predicted a further increase in Safaricom’s share price, citing improving business prospects for the telecommunications firm.

Morgan Stanley, which was involved as a transaction advisor in Safaricom’s 2008 IPO, says the telecom firm has been a big beneficiary of recent regulatory changes and the growth of innovative products such as M-Pesa and M-Shwari.

“As rivals effectively raise voice prices, (Safaricom) is seeing improving subscriber growth,” noted Morgan Stanley in an apparent reference to recent tariff increases by the firm’s competitors.

The investment bank, which was in charge of the international pool of investors during the Safaricom’s initial public offering, also said “lower out-of-bundle data tariffs are stimulating the mobile Internet market”.

High investor demand has lifted Safaricom’s price to a one-year high of Sh6 per share in the past one month, but the momentum has ebbed off in the past week.

On Tuesday the stock dropped to an average price of Sh5.30 on what Standard Investment bank termed as “continued foreign investor selling pressure”.

On Monday, yet another stockbroker, Old Mutual Securities, tipped Safaricom to be among a basket of 12 top gaining stocks at the Nairobi Securities Exchange (NSE) this year.

In a similar research note released last week, Kestrel Capital, predicted that Safaricom shareholders could pocket higher dividends starting next year if a projected drop in the firm’s finance costs is realised, a view also echoed by the Morgan Stanley report.

“We expect finance costs to come down as the company pays off its short-term borrowings.

“With debt declining to Sh12 billion, we see the company remaining with adequate free cash flows to equity to increase the dividend payment,” said Kestrel analysts.

Safaricom spent Sh25.2 billion on capital investments last year down from Sh25.5 billion in 2011. Most of the cash was spent on upgrading and maintaining network infrastructure.

The total debt stood at Sh12 billion as at the half-year to September, the same as the level in 2011.

Morgan Stanley is valuing Safaricom at Sh6.50 a share.

It says the prediction comes after factoring in a lower backdated cross-network calling rate of Sh1.44 per minute and the SIM card registrations that have seen up to a million un-listed subscribers switched off.

Morgan Stanley predicts that an expected 10 per cent excise tax on M-Pesa transactions will likely be passed on to consumers “with limited impact.”

“Elections due in March 2013 and higher inflation could impact purchasing power of users, leading to lower elasticity and lower average revenue per user,” warns Morgan Stanley in the report.