Citi Retains Neutral Rating on Safaricom Stock, Concerns on Ethiopia Investment, Competition and Regulatory Risks

Analysts at Citi Bank have maintained a neutral rating on the shares of Safaricom Plc but raised price target by 15.9% to Sh 40, based on the telco’s closing price of Sh 34.5 on Friday 18 March 2022.

Despite reporting impressive financial results for the first half of the year, Citi says the company is facing a number of uncertainties in the short term.

Ethiopia Investment Case

According to the research paper, the success of Safaricom in Ethiopia hugely depends on mobile money citing the level of investments, macro dynamics as well as the risk involved.

“As we update our estimates based on guidance and current situation, we continue to believe mobile money license is important for Safaricom to generate positive return on this venture. Ethiotel already launched mobile money services last year and reported more than 6m subs by end of June 2021. Safaricom’s experience in mobile money could drive penetration but with continued delay in license, it will only lose market share.” reads the paper in part.

The analysts estimate the Safaricom Ethiopia operations will need investment of around $3.8 Billion in the medium term including initial license fee. The Nairobi Securities Exchange listed telco has not disclosed the capital structure but has previously said it plans to fund the operation via equity, foreign debt and local debt.

“Currently we assume operations will be financed by USD debt with low cost of debt around 6%. However, given the risk profile of these operations and inflation in Ethiopia, we believe the cost of debt (both foreign and local) to be much higher than Safaricom’s current cost of debt. Safaricom already took a bridge loan for initial payment of $400m to fund the initial license fee. The company is planning to convert this into a term loan.” says Citi.

The research arm of Citi believes that an improvement in the political situation in Ethiopia and issue of mobile money license is the catalyst needed to drive the share price higher in the short term.

Regulatory Risk

Safaricom recently appealed the decision by the Communications Authority of Kenya (CA) to cut the mobile termination rate (MTR) by 88 per cent, terming the move unprocedural. The telco wants the CA decision to cut the rate that telcos charge each other for interconnecting customers from Sh0.99 to Sh0.12 declared invalid and set aside. Citi says that the outcome of the telco’s appeal against interconnect rate cuts could act as a positive or negative catalyst depending on whether there will be an 88% cut in interconnect rates.

At the same time, Citi cautions that investors could be cautious on the recently issued NPS (National Payment System) strategy by CBK which stresses interoperability. Media reports indicate that the Central Bank of Kenya (CBK) could force Safaricom to accept cash from rival firms such as Airtel on its Lipa na M-Pesa, enabling a seamless transfer of money through merchants.

The Central Bank of Kenya recently published a discussion paper on its Central Bank Digital Currency (CBDC), while seeking public comments on the potential benefits and risks, and related policy considerations, of introducing a CBDC in Kenya. Citi argues that the introduction of a central bank digital currency along with interoperability could be a risk to M-Pesa’s market share. The discussion paper suggests a CBDC will benefit lower value transactions and increase financial inclusion as there could be no charges involved.

On the positive, the analysts believe that growth potential in the domestic market remains strong as increase smartphone ownership will continue to drive data usage higher. At the same time, the efforts by the Central Bank to increase financial inclusion and digital payments will continue to drive mobile money transaction volumes.

In conclusion, Citi rates Safaricom stock neutral with the company’s earnings growth being mainly driven by M-Pesa and data revenue growth. However, the regulator’s newly launched national payment strategy could worry investors on the effect it could have on M-Pesa. In the short term, Citi sees competition as elevated while in the long run, rational. The launch of operations in Ethiopia in the near term will also represent additional risks for the largest mobile operator in Kenya.


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