In a recent interview with Safaricom’s interim CEO Michael Joseph, Global Investment Bank and Financial Services Citi revealed that the telco expects to have countrywide 4G coverage by July 2020 and a number of exciting new products around Mpesa in the coming year.
In a note sent to investors, Citi says M-Pesa penetration is full, however, there is room to drive active users and number of transactions from the average of 13 transactions a month to at least one transaction daily. The telco’s management expects faster growth of “new business” as the number of use cases continues to grow. Michael Joseph also reiterated that a number of new products are in the pipeline to be launched in early 2020. Some are targeted to improve saving culture, others to improve access to products used on a daily basis.
According to Michael Joseph, the cost of credit is still high and the success of new products is difficult to predict. However, he says Fuliza take up exceeded expectations. Safaricom is considering Pay-As-You-Go model to drive device and usage take up.
The CEO also says the recent simplification of the tariffs with no expiry has been positively perceived by customers and it will be difficult for competitors to match. The move is part of overall program to improve the telco’s operations and will be done in three phases which involve Simplification of the brand and its products, 4G everywhere new M-Pesa products.
In addition to the privatization of monopoly state-owned Ethio Telecom, the Ethiopian government is considering sale of two licenses. Citi says the bids structuring is likely to take the form of a competitive selection so-called “beauty contests” as was the case in Myanmar (where the award of license was also asymmetric).
Mr Joseph expects that good political relations between Kenya and Ethiopia would play a big role in the licensing discussion. Safaricom is considering making a bid as part of a consortium of four partners, including Vodacom and two financial ones. New license is being considered.
The note says that Safaricom is looking for a minority stake and both Vodafone and Vodacom Group are likely to take control given their combined stakes in the deal. According to Michael, the size of Safaricom stake will depend on overall cost, which the company plans to fund via debt. The telco is currently debt-free.
Incase the Safaricom consortium fails to acquire licencing, the telco sees an opportunity to partner with Ethio Telecom particularly on the provision of Mobile Financial Services.
New CEO, Peter Ndegwa:
According to Mr Joseph, the Mr Peter Ndegwa fits the bill as Safaricom CEO, except for telecom specific criteria. Mr M.Joseph intends to support the new CEO through transition and possibly for longer.
Valuation and Share Price
Citi has therefore placed a Ksh 30.1 price target based on the telco’s superior growth and synergies between the digital platform and telecom business. However, Citi sees some risks that could prevent Safaricom’s share price from reaching the Ksh 30.1 target price or even outperform. Some of these risks include financial regulation as well as the entry of international payment platforms, which could use pricing as a way to gain market share.