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Capital Markets

Safaricom share priced ‘above market peers’, Citi team says

Safaricom chief executive Bob Collymore with consumer business general manager Sylvia Mulinge at the launch of the firm’s 4G-enabled device in Nairobi on May 8, 2015.  PHOTO | SALATON NJAU
Safaricom chief executive Bob Collymore with consumer business general manager Sylvia Mulinge at the launch of the firm’s 4G-enabled device in Nairobi on May 8, 2015. PHOTO | SALATON NJAU |  NATION MEDIA GROUP

The Safaricom stock at the Nairobi Securities Exchange (NSE) is trading at a premium compared to peers in emerging and frontier markets, investment bankers at Citi Global Markets say.

In the latest update on the telecommunications operators, the analysts have changed their recommendation from the “buy” made in January this year to “neutral”—meaning investors should not expect much increase in price going forward, with chances it could edge down.

The report was issued last Friday as the stock traded at about Sh17. Citi forecast the price is unlikely to exceed Sh18.30 in the next 12 months. Tuesday, the share price stood at an average Sh16.65, having recently touched an all-time high of Sh17.90.

“While we continue to like the company, given its clear dominance in the Kenyan market, which positions it for sustained earnings growth over the medium/longer-term, we are less enamoured with its valuation at current levels…For now it looks too expensive versus peers,” says Citi.

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Safaricom’s price-to-earnings (P/E) ratio – which indicates how expensive a share relative to its profit – shows its stands at over 20 while that of its peers is only 16. It means that investors are more likely to be encouraged to buy its peers because they are cheaper and remain profitable.

Further the report looks at Safaricom’s enterprise value (EV) relative to the earnings before interest, tax, depreciation and amortisation (EBITDA).

The EV/EBITDA, also called enterprise multiple, is a measure of the fair market value of a company and it takes into account liabilities of a firm – making it possible to compare with firms in the same industry. It is different from the P/E ratio, which does not take into account liabilities. The higher the enterprise multiple, relative to peers, the higher the chances of overvaluation or overpricing.

“Safaricom’s persistent strong run and elevated valuation – EV/EBITDA of 8.7x (versus peers of 6.1x) and P/E of 20x (versus 16x) – prompts us to downgrade our rating on the stock to Neutral, from Buy, with our new target price of Sh18.30,” says the Citi report dated May 8.

The analysts, however, say their expectations of minimal price increase did not mean the firm should brace for difficult times in financial performance, but is in fact headed for higher revenues.

“We remain positive on the company, which we believe is positioning for sustained growth and potential new revenue streams in the longer term. Safaricom screens favourably when appraised against earnings growth projections, supporting our view that the share warrants its (current) premium rating,” says Citi.

The report says that Safaricom’s home broadband strategy dubbed “The Big Box” aims to win the home market by exploiting technological convergence and digital migration and could bolster long-term growth.

“We believe the strategy (which endeavours to deploy set-top boxes into households) could not only boost data revenues via high-speed home broadband (exploiting 3G and 4G technology) but also position the company for new revenue streams,” it says.

In January when Safaricom was trading at about Sh14 per share Citi advised its clients to buy the share, saying that it was headed for Sh16, which would amount to a 15 per cent appreciation. The share has since risen by an even bigger margin with the highest price being Sh17.90 – which amounts to 21 per cent increase since January.

Besides the high-speed broadband, Safaricom has other advantages. The analysts note that a digital terrestrial television signal receiver would enable customers to receive free-to-air channels that do not require the telecommunications operator to get a licence as they are being broadcast by licensed broadcasters.

“This would be free to customers to make the offering even more attractive and would also help those left stranded by the analogue switch-off (in providing STBs that receive a digital signal),” says Citi.

Safaricom would also be able to offer content on demand. “Down the line – and this is where it becomes particularly interesting – if/when content on demand becomes more pervasive in Kenya, this can also be streamed into Safaricom’s customer base,” says Citi.

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