Safaricom Plc (NSE: SCOM) FY19 Earnings Note

Safaricom Plc (NSE: SCOM) announced a 14.7% y/y growth in FY19 earnings per share (EPS) to KES 1.58. Similarly, growth in operating profit (EBIT) was sturdy at +13.0% y/y to KES 89.6Bn. Service revenue rose 7.0% y/y to KES 240.3Bn supported by positive growth across all revenue segments except SMS (voice +0.3%, SMS -1.2%, mobile data +6.4%, fixed data +22.7% and M-PESA +19.2%). The slow growth in mobile data revenue is partly attributed to the absorption of the 500bps increase in excise tax (to 15.0%) on data services. The recommended dividend per share (DPS) has increased by 13.6% y/y to KES 1.25. Additionally, a special dividend of KES 0.62 per share has been proposed, with books closure date to be communicated later. The total dividend (translating to a yield of 6.3%) will be paid by 1st Dec 2019.
 
Positives:

  1. Service revenue grew by 7.0% y/y to KES 240.3Bn. This was driven by robust growth in M-Pesa (19.2% y/y), fixed data (22.7% y/y) and solid growth in mobile data (6.4% y/y). Growth was a result of both subscriber base increase (2.2Mn y/y), as well customer Average Revenue Per User (ARPU) improvement, with the operator’s total customer base and blended ARPU increasing by 7.7% and 3.1% y/y to 31.9Mn and KES 658.3, respectively.
  2. M-Pesa Revenue, +19.2% y/y. Mpesa revenue grew by 19.2% y/y to KES 75.0Bn to account for 31.2% of service revenue from 28.0% in FY18. 30-day active M-PESA customers grew by 10.2% to 22.6Mn while 30-day M-PESA ARPU was up by 9.8% y/y. Penetration of active M-PESA users has steadily been increasing to stand at 84.7% of Safaricom’s 30-day active customers compared to 82.6% in FY18. In addition to customer numbers, growth was supported by a 23.3% y/y increase in peer to peer transactions and a 26.9% y/y growth emanating from M-Pesa’s new business segment (includes Lipa Na M-Pesa and M-Shwari, KCB-MPESA and fuliza). The new business segment captures Safaricom’s innovation pegged on the M-Pesa ecosystem and has steadily been increasing its revenue contribution to M-Pesa from 18.4% in FY16 to 28.1% in FY19. This is expected to steadily rise given new services that excite the market, like the recent Fuliza. Fuliza, launched 3 months ago, has logged in 8.8Mn customers and has lent out KES 45.0Bn.  
  3. Fixed data revenue, +22.7% y/y. Fixed data continues to post stellar growth supported by the aggressive roll out of fibre network, currently spanning 6,700km (1,700KM of new fibre line lay-out in FY19). The fibre network registered 21,000 new connections since 1H19 with total homes connected at 100,000. Expansion within the current fibre network still exists from the 200,000 homes that are close to the network but yet to be connected.
  4. Mobile data revenue, +6.4% y/y. This was on the back of solid gains in active mobile data customers (+6.6% y/y) and despite a softer 1.1% y/y growth in mobile data ARPU (KES 175.7). While the revenue growth is solid, it falls behind the c. 22.3% growth of recent years. We attribute this partly to the 36.0% effective cut in price per MB in 1H19 as price competition increases in mobile data space. The price cut contributed to the 72.8% y/y increase in data usage per customer to 727MB from 421MB in FY18. Additionally, Safaricom absorbed the 500bps increase in excise tax on mobile data, which impacted mobile data revenue. Potential for mobile data revenue expansion exists given that 4G capable handsets are pegged at 3.3Mn customers (out of the 31.8Mn base) and the company’s recent launch of affordable 4G capable handsets retailing at KES 3,999. Additionally, about 20Mn customers on the Safaricom network do not have a smartphones.
  5. EBITDA margin improved by 151bps y/y to 49.8% above a 4-year average of 47.3%. This was mainly due to a marginal 2.6% y/y growth in direct costs and a 5.8% y/y moderate increase in operating expenses. Anchored by the 7.4% y/y growth in total revenue, this led to a 10.7% y/y growth in EBITDA to KES 124.9Bn. EBIT and net profit margins registered y/y improvements of 179bps and 161bps to 35.7% and 25.3% respectively.

Negatives:

  1. Negative growth in SMS revenue, -1.2% y/y. This was tracked by a marginal 2.8% y/y growth in 30-day active SMS customers and a 3.4% y/y decline in SMS ARPU. Given the softening in usage of traditional methods of communicating (voice and SMS), contribution of SMS revenue (which has steadily been on the decline from 9.7% in FY16 to 7.3% in FY19) is expected to shed further as internet-based communication applications continue gaining prominence.

Our View:

A 14.7% growth in bottom-line numbers in the current economic environment indicates a resilient business with a strong competitive edge and keen on long term growth and value. Additionally, with a strong cash flow position (KES 88.5Bn), SCOM shows stout affiliation with its shareholders by offering to return excess capital by way of special dividends, KES 0.62 in FY19 (KES 0.68 in FY16). Potential regulatory interventions are still possible despite the pending merger of Airtel and Telkom (32.4% market share). These could be on certain product areas such as mobile money interoperability, new tariff approvals, fees on mobile loans, loyalty schemes and promotions. These potential regulatory controls could erode Safaricom’s competitive edge in these product segments.

We are currently reviewing our recommendation on Safaricom

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