Citi Research has upgraded Safaricom’s share to neutral, noting that the risk-reward is balanced after the recent de-rating. According to Citi’s report, the de-rating was warranted because of the recent tax reviews, regulatory uncertainties, and competitive pressure which remains high going into the second half of the current financial year.
“At the current levels, we think the risks and rewards are more balanced and valuation appears more reasonable,” the report reads.
Citi has, therefore, cut the price target to Sh26.1 from Sh27.20 and raised the stock to neutral. In addition, Citi expects 5.5 per cent share price return, 4.7 per cent dividend yield, and a total return of 10.2 per cent.
The Downside and Upside Risks
Several risks are bound to affect Safaricom’s earnings including the lack of clarity on the money transfer in the Finance Bill 2018 which leaves it open for enforcement authorities to charge higher rates for M-Pesa services offered in partnership with banks.
The other risk is the new telco tax that came into effect in July 2018. “As of the date of this report, operators made no adjustment to the tariffs; we see the risk there may be a delay in price adjustments for competitive reasons, which would negatively affect revenue and earnings. […] demand may also be weaker than we assume, should prices be adjusted,” Citi observes.
Other risks include the looming regulation of the telecom sector and potential unfavourable decisions resulting from future budget reviews as the government seeks to reduce budget deficits and public debt.
“The issue of budget deficit are likely remain relevant beyond FY19F and further tax measures may be considered, including those that may affect the telecom sector,” Citi notes.
The upside risks according to Citi are reduction in risk perception and “stronger than expected financial and operational performance.” “Faster growth in scale of merchant payments could drive growth beyond our expectations,” Citi adds.
Citi also notes that other risks lie with the potential introduction of the Financial Markets Conduct Bill which could affect the lending over mobile platforms such as M-Pesa and the competition risk by merchant payments against M-Pesa.
