Safaricom – Expanding the Dynamics of Africa’s Telecommunication Industry
Company Overview
Safaricom is a Kenyan telecommunications company established in 1997 as a fully-owned subsidiary of Telkom Kenya but is presently under the management of Vodafone Group Plc. According to Safaricom’s 2023 report, the company remains the frontrunner in the telecommunications industry of Kenya, boasting a whopping market share of 65.7% (vs 65.3% in 2022), and an active subscriber base of 33.11 million.
The company’s total revenue for its fiscal year 2023 was KShs 310.9 billion, equivalent to ($2.334 billion), representing a 4.3% growth from its 2022 revenue of KShs 298.07 billion ($2.574 billion). However, a 22% decline was reported in Safaricom’s profit after tax for 2023 of KShs 52.48 billion ($394 million), from KShs 67.49 billion ($583 million) in the preceding fiscal year. Similarly, the company saw its earnings per share (EPS) decline to KShs 1.55 in 2023, from the KShs 1.74 reported in 2022.
Safaricom Share Price YTD Performance (KShs)
Source: African Stock Exchange (AFX)
Safaricom was listed on the Nairobi Securities Exchange (NSE) on June 9th, 2008, and is currently positioned as the most valuable stock on the NSE with a market capitalization of KShs 613 billion ($4.153 billion) as of September 14th, 2023 which represents nearly 40% of the entire Nairobi Securities Exchange equities market. However, the company’s share price has tanked in recent weeks with a YTD decline of -34.51%, while also recording a negative YoY return of -40.67% as of September 2023.
Industry Dynamics & Competitive Advantage
The telecommunications industry in Kenya has thrived largely due to the spike in demand for mobile voice, data, and internet services. According to the Communications Authority of Kenya’s most recent report in Q4” 22, there were 47.7 million active mobile data/internet subscribers, of which 66.8% were for mobile broadband. Although Safaricom, Airtel, and Telkom Kenya are the main players in the Kenyan telecommunications market, other major players in Kenya include data communications services like Jamii Telecommunications, undersea cable companies like East African Marines Systems, and South African firms like MTN and Vodacom.
Source: Communications Authority of Kenyan
Porter’s Five Forces
- Threats of New Entrants
Safaricom dominates the Kenyan market, benefiting from economies of scale, and ensuring customer loyalty with competitive prices. Stringent entry requirements hinder new competitors.
- Threat of Substitutes
Safaricom faces competition from other carriers and digital communication, but M-PESA’s popularity and market dominance mitigate substitute threats.
- Bargaining Power of Suppliers
Safaricom’s supplier relationships and financial strength enable favorable negotiations, potentially leading to mutually beneficial partnerships, resulting in moderate supplier bargaining power.
- Bargaining Power of Customers
Customers in Kenya’s telecom industry have significant bargaining power due to substitutes. Safaricom counters this by offering attractive packages, and discounts, and investing in customer service, further strengthening customer bargaining power.
- Rivalry Among Existing Competitors:
In Kenya’s competitive telecom sector, Safaricom faces rivals like Airtel and Telkom Kenya, driving affordable and advanced services. Yet, Safaricom’s market share and loyal customer base provide a significant advantage. They also invest heavily in network infrastructure for reliable, superior services.
Management
The management team of Safaricom Plc is composed of different nationalities, headed by its CEO Peter Ndegwa and Chairman Michael Joseph. Safaricom has seen its top and bottom lines grow over the two years since Peter Ndegwa assumed the position of Chief Executive Officer (CEO), as service revenue grew by 5.2% from KShs 295.7 billion ($2.220 billion) in 2023 from the preceding fiscal year of KShs 281.1 billion ($2.428 billion) in 2022. Mr. Peter Ndegwa earned a total remuneration of $2,528,290 (KSh 332 million) for the year ended March 31st, 2023. In our peer comparison, the CEO of Airtel Africa, Mr. Segun Ogunsanya, received a sum of $1,404,000 (N577 million) according to the company’s full-year 2021/22 report, while the CEO of MTN Nigeria, Mr. Karl Toriola, received a remuneration sum of $1,896,155 (N850 million).
Our management review of Safaricom showed the continued efforts of the company to expand its operations beyond the shores of the Kenyan market, and specifically, the CEO mentioned the progress being made in Ethiopia, and its expected commercial launch in the country within Safaricom’s present calendar year (April 2023–March 2024). Projecting forward, the company’s focus is to scale its Ethiopian operations, with the expectation that Safaricom Ethiopia will require significant investment in the initial years of operations before turning profitable. Additionally, Mr. Peter highlighted the company’s herculean task of building around 800 to 1000 network towers needed for a full commercial launch in Ethiopia.
Financial Health
The PPE expenditure of Safaricom for 2023 was KShs 38.56 billion ($289.56 million), which represents an 11.23% increase compared to the previous financial year KShs 34.67 billion ($299.56 million). The company reported that capital expenditure (CAPEX) for 2023 reached KShs 40.868 billion ($306 million), representing a 23.5% increase from the CAPEX recorded in 2022 of KShs 33.091 billion ($285 million). However, the increase in Safaricom’s CAPEX expenditure in its financial year 2023 did not impact Operating Free Cash Flow (FCF) negatively. The company’s Operating FCF rose 5.28% in 2023 to KShs 82.707 billion ($621 million), from the previous financial year print of KShs 78.557 billion ($678 million). Thus, this presents a good sign that Safaricom was able to attain an increase in its Operating FCF despite the rise in its PPE spending for 2023.
Growth Trajectory
Our review of Safaricom’s growth numbers from its 2023 financials showed that service revenue grew by 5.2% to KShs 295.69 billion ($2.01 billion), largely driven by increased usage of non-voice services, mainly M-PESA, fixed service, and mobile data. Hence, M-PESA revenue currently accounts for 39.6% of service revenue, which is an increase from the 38.3% reported in the same period last financial year.
Safaricom Revenue and Earnings (2020-2023)
Source: Safaricom’s Annual Report
For context, M-PESA revenue recorded a growth of 8.8% to KShs 117.2 billion ($890 million), driven by the 16.2% increase in chargeable transactions per one-month active customers. Further growth numbers on Safaricom showed that mobile data revenue, which accounts for 17.4% of the company’s service revenue, grew by 11.4% to KShs 53.95 billion ($410 million). Operating profit (EBIT) decreased by -22.1%, due to an increase in operating costs, pricing problems, and macroeconomic issues in Kenya stemmed the tide of operating profit for Safaricom. In addition, the number of active mobile (SIM) subscriptions stood at 66 million as of March 31, 2023, compared to the 64.9 million subscriptions recorded in the preceding year.
Profit Consistency ☑️
Our profitability analysis of Safaricom showed the company’s strong positioning as one of the leading telecommunications players in Kenya. Safaricom has continued to increase its revenue over the last four years. Safaricom’s net income growth has been unsteadied and fluctuating over the last four years. The profitability was affected by the rising customer tensions, negative perception of value against the need to maintain premium pricing, and the macroeconomic crisis in Kenya such as currency depreciation and rising inflation.
Company YoY Net Income (2020-2023)
Source: Safaricom’s Annual Report
Revenue Breakdown
Voice, Data, and M-PESA contributed the largest to Safaricom’s revenue. In FY 2023, M-PESA recorded KShs 117.19 billion ($880 million), representing an 8.8% increase from the 2022 recorded KShs 107.69 billion ($930.44 million). This growth in the M-PESA’s revenue is expected to be on the rise as Safaricom continues to retain and expand its agent network which has fueled M-PESA’s success, leveraging on M&A, and partnership to unlock future growth and new services such as insurance.
Safaricom Revenue Contributors in 2023 (%)
Source: Safaricom’s Annual Report
Furthermore, the company is expanding its broadband market reach to complement fiber and 4G/5G, enhancing the personalized experience with more customer knowledge points, and also developing integrated customer channels to enhance its customer retention strategy and revenue.
Profitability 4-year Average (2020-2023)
Source: Company’s Annual Report
From this historical trend, we can deduce that Safaricom’s ROA and ROIC metrics outperformed those of our benchmark peers, MTN Nigeria and Airtel Africa, over the four-year average used for this analysis. However, MTN dominates in terms of its ROE, owing to its consistent profitability.
Safaricom’s Impact on the Kenyan Economy
Safaricom Plc has arguably led the forefront of the telecommunication industry in Kenya. The company boasts a huge presence across the country with over 65% market share in the telecommunications sector. Safaricom has a robust corporate social responsibility program that focuses on education, health, and economic empowerment.
The Safaricom Foundation, responsible for the company’s CSR activities, has engaged in project implementation across various areas such as health, education, economic empowerment, environmental conservation, water, arts, music and culture, sports, and disaster relief. Specifically, the company has impacted more than 7 million lives through its foundation by offering 1,135,613 jobs and scholarships to youths and students.
Safaricom’s commitments have led to its reduction of overall carbon emissions by 6% from 66,119t to 62,073t as it continues to promote a zero-harm work environment. This assists in ensuring that the company continues to expand its footprint across the country. Furthermore, the company contributes significantly to the government’s revenue through direct and indirect tax payments. The telecommunication industry is germane to the Kenyan economy. Thus, the continued growth and expansion of Safaricom remains a pillar to this industry, as the company strives to expand its tentacles to other countries in Africa.
Disclaimer
This article is meant for informational purposes only and is not a recommendation to buy, sell, or hold a position in this stock. Migasuto Global Services will not be held liable for any investment decision taken based on the information provided in this newsletter.
