Safaricom, the largest mobile phone company in Kenya and the purveyor of the near-ubiquitous money transfer service M-PESA, on May 11 reported operating results for its fiscal year ended March 31. The results were very powerful and served to solidify our confidence in the efficiency of the company’s current operations and its robust long-term prospects. Safaricom is the single largest holding in our Africa Strategy.
Here are the financial highlights for the fiscal year ended March 31, 2017:
Safaricom is the largest public company in Kenya and its stock is the most liquid of the seventy or so issues that trade on the Nairobi Securities Exchange. Safaricom’s financial results for the past year demonstrate to us that the company continues to solidify its leadership position in the mobile market in Kenya, a country of 45 million people.
One thing we look for in potential investments is strong competitive positioning. Simply put, Safaricom, with its high quality network, large customer base and the stickiness of its M-PESA offering, is very difficult to compete against. Yet all companies face risks and Safaricom is no exception. Perhaps the biggest risk it faces is actually a by-product of its dominance: potential government regulation. It also faces competition, particularly at the low end, from the other four mobile service providers in the market: Airtel, Finserve, Telkom and Sema Mobile.
Voice revenue, which accounts for 46% of total revenue, is growing in the low single digits and will likely level off. It is mobile data and M-PESA that are the growth drivers for the company, accounting for more than 40% of total revenue. Increasingly, Kenyans are demanding higher data packages. In the year, mobile data customers increased 18% to 16.6 million.
M-PESA, the company’s money-transfer service, really sets Safaricom apart from other mobile service companies. “M” stands for “mobile” and “PESA” means money in Swahili. You cannot go far in Kenya without seeing an M-PESA agent. M-PESA customers increased by 14.6% during the year to 19 million. We view M-PESA as a nearly essential service for many Safaricom subscribers that both makes Safaricom’s service more sticky while layering a discrete and fast-growing revenue stream on top of the existing subscriber base.
We view management as shareholder-friendly. As the percentage of capital expenditures to revenues decreases over the next few years, the company’s free cash flow is set to surge. Accordingly, the company has declared a dividend of 0.97 KES with an ex-dividend date of September 1, 2017 and payment due in December 2017. This dividend reflects a 27.5% increase from last year’s dividend and the yield on the current share price of KES 20.50 is 4.7%. In the coming years, we believe management will have the wherewithal to continue to increase the dividend and/or buy back shares. We are also pleased that the board has extended the management contract of Bob Collymore, the company’s CEO. To view his presentation of the year’s financial results (20 mins.), please click here.
For the FY Results Presentation, please click here.
Safaricom is arguably the most important company in Kenya, a country that we believe has vast growth potential over the coming decades. As Kenya develops, it is Safaricom that will be providing much of the connectivity to enable that growth across all parts of the economy. We continue to have a high degree of confidence in Safaricom to generate profitable growth while investing sufficiently back in its network to keep its lead over the competition.
Please do not hesitate to call or email me to discuss any aspect of investing in Africa. My email address is email@example.com and my phone number is +1.619.435.1701.
Africa Capital Group LLC
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Coronado, CA 92118