Capital Markets

Safaricom seen raising dividend as debt falls

An M-Pesa agent at Kangemi in Nairobi attends to a client. Kestrel Capital says such innovative products will boost Safaricom’s profits. Photo/File
An M-Pesa agent at Kangemi in Nairobi attends to a client. Kestrel Capital says such innovative products will boost Safaricom’s profits. Photo/File 

Safaricom shareholders could pocket higher dividends starting next year if projected drop in finance costs is realised, analysts at Kestrel Capital have predicted.

In a research note released last week, Kestrel Capital forecasted that Safaricom’s debt levels would fall significantly in the next three years, while relatively new products like M-Pesa and M-Shwari would boost profit.

This could free cash that the managers may use to pay shareholders higher dividends.

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

Kestrel notes in the report that Safaricom chose to retain short-term borrowings when there was a cash shortage in 2012, which could work in its favour this year since interest rates have since declined.

“With the internally generated funds, we believe that Safaricom will pay off the short-term debt, leaving the corporate bond in its books.”

The telecommunications firm is projected to pay off the first tranche of its Sh7.5 billion corporate bond in the second half of 2015 and the second tranche (Sh4.5 billion) in the second half of 2016. M-Pesa and data users are also expected to continue growing revenues as usage of these products improves.

The telco posted a half-year after tax profit of Sh7.77 billion in September, a 93.8 per cent increase over the Sh4.01 billion posted in the same period in 2011.

Its earnings per share increased by 90 per cent to Sh0.19 for the half year period of its current financial year, from Sh0.10 over the same period in 2011, while its free cashflow per share improved to Sh5.14 from negative 74 cents respectively.

“This is based on projections and we tried to be as conservative as possible. The share price may, however, come down in the short term…there was also a report on decreased market share,” said Kuria Kamau, a research analyst at Kestrel Capital, referring to the forecast.

Burbidge Capital head of research Vimal Parmar said Safaricom’s expansion capital expenditures may decline adding that maintenance expenses may remain the same or increase.

The Safaricom stock accounts for a significant portion of Kenya’s stock market. Again, foreign investors who want to get exposure to frontier markets include the share in their portfolio due to its high liquidity, driving up demand.

“I think dividends may increase but this depends on free cashflow but they will have to get board approval,” said Mr Parmar. “Dividends will depend on free cashflow availability.”

Faida Investment Bank operations director Rina Hicks, however, said that even with a projected drop in capital expenditures, predicting dividend payouts was tricky but added Safaricom has consistently created and unveiled new services such as M-Shwari that are able to attract and retain customers.

Voice revenues remain the company’s bread and butter and stood at Sh37.42 billion as at the end of September, Sh31.49 billion as at the end of September 2011 and Sh33.31 billion in 2010.