It is a Buy for Safaricom – CITI

A report by Citi recommends a buy for Kenya’s leading mobile operator. This is based on expected growth in MPesa revenues, increased partnership with the Kenyan government, improved regulatory environment, and reduced competitive pressure in future.

Citi predicts growth in MPesa revenue mainly driven by retail transactions, e-commerce, and agri-tech. The mobile phone operator recently launched Fuliza, an overdraft product that is likely to increase MPesa revenue.

Going by the popularity of Safaricom’s similar Okoa products, Fuliza is expected to follow the trend. The overdraft will enable traders make larger purchases than they previously could. Larger purchases will translate to higher yield per transaction. Additionally, Fuliza is expected to generate fees of approximately 3 per cent of the transaction value up from 0.5 per cent previously earned through Lipa na Mpesa transactions.

The company’s e-commerce business, Masoko, is also expected to generate increased revenues in the near future. Safaricom’s ecommerce business is estimated to have 50 per cent of Kenya’s ecommerce business. According to Citi, “Safaricom has a strong potential to become a winner in e-commerce.”

Despite its recent development projects, Kenya’s dominant Telco Company is likely to face stiff competition from its main rivals; Airtel and Telkom Kenya in the short term. In the first half of financial year 2019, the competitors have experienced sluggish growth.

While the competition is expected to pick up in the second half, it is not likely to last in the long run. Citi predicts that the rivals lack the heavy capital injection needed to sustain competition in the long term.

In recent years Safaricom has increased its partnership with the Kenyan government. The company is Kenya’s top tax payer; it has developed Kenya’s IT infrastructure, and has been active in driving financial inclusion in the country. The close partnership between Safaricom and the government is expected to stay unchanged.

Although Safaricom has been in government’s good books, it has had its share of conflict with the market regulator – Communications Authority. In 2018, the company was accused of abusing its dominance to keep out competition. However, the regulator lacked evidence to support those claims. Although the matter is yet to be settled, a positive outcome is expected.

Safaricom’s share price closed at Ksh23.5 as at the end of business 14 Jan 2019. Citi’s target price is Ksh27, which is 14.9 per cent gain on the company’s stock value.