Citi Research forecasts that giant telco firm, Safaricom, net profit will to rise from KSh 74.7 Billion posted in the year ended March 31st, 2020 to KSh 78.7 Billion in 2023.
According to an analysis by Citi Research, part of the Citigroup Global Markets Limited, Safaricom is a growth story with earnings driven by M-Pesa and data revenue growth.
“We are optimistic in our outlook for M-Pesa growth, and see merchant payments and digitalization of trade as opportunities ahead.
Competition should remain elevated going into the 2021/22 financial years; however, we see this as a source of short-term pressure on growth, in the longer term we see the case for competition to be rational,” said Citi Research.
Analysis from Citi also projects that Safaricom’s Net Profit for the financial year ended 31st March, 2021 will decline to KSh 54.1 Billion before picking up again to KSh 74.22 Billion in 2022.
A slump in Safaricom net profit for the financial year ended 31st March 2021 is attributed to action taken by the Central Bank of Kenya (CBK) to waiver transaction fees for several mobile cash services, as a cushion against effects of coronavirus pandemic on firms and households.
Tracking data published by the Central Bank of Kenya (CBK), Communication Authority of Kenya and two publicly listed banks, KCB and Equity, Citi says the volume of digital loans has declined, hurting revenues of banks and telcos.
“The number of digital loans declined in Q2,2020, based on data from KCB, which is one of Safaricom partners in micro lending i.e. KCB M-Pesa and Fuliza overdrafts. KCB also reported an increase in rollover requests and NPLs,” said Citi Research.
Waiver of fees on transactions below KSh 1,000 has also denied telcos, including Safaricom, revenue from mobile cash transfers.
Citi research shows a fall in average value of person to person(P2P) transactions to KSh 1,300 from KSh1500 quarter on quarter. The trend is likely to have been driven by the tendency of wallet users to break down transactions to below the chargeable threshold of KSh1,000.
Value Point of Sale (PoS) transactions also declined in Q2,2020, which Citi thinks is a reflection of limited working hours of formal trade as a result of night curfews and earlier travel restrictions.
Growth in agency transactions, which include deposits and withdrawals, declined through to June 2020.
Growth tends to correlate with Purchase Managers Index (PMI) data, which points to a contraction of the economy that has seen a decline in demand, production and temporary and or permanent cost optimization between January and July 2020.
“Decline in agency transactions appears to have been driven by a decline in cash withdrawals. Mobile money deposits grew 4% quarter on quarter in Q2,2020, which points to mobilization of cash into wallets.
Cash withdrawals, based on the data reported by financial institutions, declined through 1H20/ 2Q20,” said Citi. In its outlook, Citi outlines several risks that Safaricom faces. These include intense competition as regulators support smaller players.
If agent (float) interoperability is considered at some point in future, this could undermine the competitive advantage of M-Pesa.
Safaricom could also experience faster-than-expected pressure on its voice revenue as data usage picks up, and smartphone penetration rises. Other risks include entry of international payment platforms, which could use pricing as a way to gain market share, shaking the tree on which Safaricom is perched.
Citi analysts have recommended a buy for Safaricom shares, which it has set a target price of KSh 33.1