Citi bank analysts have blasted Safaricom in a research note, downgrading its recommendation to sell saying the company has reached market saturation.
“Valuation is at historical peak, expectations are coming down — Safaricom share price re-rating, which reached a historic peak, appears to be disconnected from expectations, which continue to decline. We are concerned that downside risks are starting to emerge and are likely to drive the valuation premium lower.” Citi noted.
The analysts further note that regulation is emerging as a risk as Communication Authority is considering remedies for Safaricom’s market position. This is following the recent release of market dominance study by Analysis Mason that recommended a number of remedies that may favour smaller players, increase competitive intensity and potentially put pressure on Safaricom’s margins. Among remedies proposed are retail price interventions, tower sharing, national roaming; MTR asymmetry is also mentioned as a remedy proposed by the competition.
“Some, such as national roaming and MTR asymmetry, may improve the health of completion with a relatively minor impact on Safaricom. However, in combination with retail price controls, we think, the risk to revenue and margins may rise should smaller peers pass on regulatory tailwinds to consumers in an attempt to boost market share, as opposed to taking care of their own (deteriorating) financials.” the report reads further.
M-Pesa faces revenue headwinds
According to Citi’s scathing verdict, M-Pesa faces revenue headwinds due to; subdued private sector growth as lending growth to the sector remains low, divergence of share of growth in m-payments in favour of platforms launched by banks (Pesalink), structural migration to cashless transactions are some of the downside risks to M-Pesa’s revenue growth in the short term.
Citi further notes that the new gambling tax which became effective in January 2018, may affect mobile money transactions should the costs increase for consumer.
Safaricom Stock Performance
The stock, which recently touched an all time high of Sh 32.75 is up by more than 85% since March 2017. According to Citi, the rally is more macro driven than fundamental. Macro factors include
- Currency stability against devaluation of currencies in neighboring countries
- Optimism over macro growth following completion of the presidential election cycle in October 2017
- Lack of other quality assets for investors to consider.
- Fundamentally, confirmation in December 2017 from Airtel Africa that its operations in Kenya are one of the least successful and in early 2018 from CA that the break-up of Safaricom is not an option being considered may have fueled investors’ confidence in the longer term prospects for Safaricom in the market.
In short: Citi is worried that Safaricom has reached its peak and there’s no room left for growth — making it a bad choice for investors.