Is Safaricom share at the NSE oversold?


Nairobi Securities Exchange. FILE PHOTO | DIANA NGILA | NMG

Safaricom investors have for some time been looking for anything positive to grasp that could be considered bullish. But those hopes were quickly dashed last week when the telco released its 2022 results.

Profit after tax was down 22 percent to Sh52.5 billion, returns on equity dropped by 27.9 percent, up from 48.4 percent in the year before and earnings per share also shaved some 10.9 percent to stand at Sh1.55.

Increasing operating costs — due to the commencement of full commercial operations in Ethiopia, high inflation, Shilling depreciation and a sharp reduction in mobile termination rates — weighed down its performance.

For that reason, the stock is likely to continue charting downward. It’s lost over 50 percent in the past 52 weeks (even changing hands as low as Sh12 per share during last week’s trading session).

Technically, it’s weak — trading below its simple moving average (SMA) of 20, below its SMA50 and SMA200. What investors want to know, is whether the stock is oversold or not.

To answer this, let’s go back to 2015 when the stock traded around current levels. It moved sideways in that year before clearing at the start of 2016.

The move marked the start of a long upward march towards its all-time peak at Sh44 set in 2021.

The same year, some analysts believed the share was overvalued at Sh16 - due to stagnation of its voice and SMS revenue and new dominance rules coming into play — and because it spotted a P/E ratio of 20x.

However, subsequent outperformance proved them wrong. With a P/E ratio of 9.8x now coupled with the struggle against a strong bearish wave near term and no evidence of bottoming out, is the company undervalued at these levels?

Some analysts believe it’s already in oversold territory, but will the market overshoot itself on the downside? Very possible.

There are reasons to believe this. Prolonged bearishness is often a sign of scepticism. Current pessimism may be a way of the market saying that the company lacks the finesse to deliver the challenging task ahead while at the same time managing its expectations.

It could be signalling a lack of confidence in the management’s expectation to achieve breakeven earnings before interest, taxes, depreciation and amortisation in year four in Ethiopia and so on.

You see, a depressed market begets a depressed market. Hence, a quicker resolution near term may not be realistic.

This is why betting against this crowd can be truly dangerous.

In sum, 2023 has been a brutal one for Safaricom, with the stock hitting multi-year lows — this follows a truly hellish 2022.

In the bullish scenario that we see consolidation around current prices, some rebound potential could be entertained.

But should cracks appear, then the scenario of a soft landing should be abandoned altogether and hastily.

I think the time for “buying the dip” has not yet arrived. But hey, this is just a rough analysis.

Moreover, there are other better options to consider, you have a reason to imagine.

Mwanyasi is the Managing Director at Canaan Capital.