Safaricom sell-off offers entry point for local investors


Safaricom PLC headquarters in Westlands, Nairobi. PHOTO | DENNIS ONSONGO | NMG

Safaricom stock has lost 46 percent since peaking in August 2021. But it’s all part of a global trend that has seen global markets retreat since the beginning of the year, partly on elevated geo-political and central bank risks.

Central banks across the Mediterranean and the Atlantic worried about the risk of price instability have begun raising rates. Additionally, foreign portfolio outflows out of equity markets that typically precede election cycles in Kenya continues to print.

Specifically, foreign portfolio net outflows on Safaricom stock year-to-date upto mid-June 2022 amounted a staggering sh8.7 billion, which compares unfavourably to the Sh2.6 billion net outflow recorded in the entire 2021.

As the street likes to say, Safaricom’s prominence in the stock market can sometimes be its Achilles heel (being the most liquid stock in the market sometimes makes it susceptible to global portfolio shifts). Nonetheless, the company’s fundamentals remain strong with three key value drivers.

First, the company continues to generate tonnes of free cash. In its fiscal year ended March 2022, Safaricom generated Sh64 billion in free cash (out of which it paid a total of Sh55 billion to shareholders in form of dividends). That cash generation machine is not about to grind to a halt.

Secondly, Safaricom is building a new growth story out of Ethiopia, a country with a population in excess of 100 million people and only one (State-owned) mobile network operator.

Safaricom goes into Ethiopia with a compelling voice, data and mobile money proposition. The company plans to spend upto $2 billion over the next five years and expects to break even in the fourth year.

Overall, it expects to achieve EBITDA (earnings before interest, tax, depreciation and amortisation) margins of 40 percent by the tenth year of operation, which is at the same level as its first decade of operations in Kenya (and reflects ability to export its existing pricing power).

Third, M-Pesa continues to lay the golden eggs for Safaricom. In the fiscal year ended March 2022, M-Pesa revenues crossed the Sh100 billion mark for the first time and the trajectory remains positive.

So much so that the continued housing of M-Pesa under Safaricom is now being cited as a growth risk (in fact, it should now be released into the blue sky). Indeed, plans to spin-off and list M-Pesa appear to be under serious considerations.

If consummated, then it should unlock significant value for shareholders. In April 2022, Genghis Capital called on Safaricom shareholders to consider spinning off and listing M-Pesa as it would unlock additional value.

They estimated the value of M-Pesa at Sh646.8 billion, making it the most valuable fintech platform in the continent. Spinning off M-Pesa would allow for further monetization of the platform as a broad fintech proposition.

Essentially, the price decline is in no way connected to fundamentals but rather a sell-off triggered by an overhang created by worries over geopolitics and central bank risks. The current price levels present an entry level for local investors who may want to profit from a reversal of the portfolio outflow, especially after the conclusion of the upcoming general elections.