Safaricom stock banks on Ethiopia
Analysts have put Safaricom stock on a neutral rating following headwinds that include regulatory risk and delayed Ethiopia licence for M-Pesa.
Cytonn analyst Anne Wacera says the telco is up against a slew of challenges that may affect its performance.
“They have a lot of things going against them at the moment, especially the delays in M-Pesa licence in Ethiopia, meaning they will take even longer to set up the infrastructure,” said Ms Wacera.
CitiBank also assigned a neutral rating for the company’s stock, capping its upside potential at 15 per cent on delayed mobile money licence in Ethiopia, regulatory clamours to split the company and pressure to cut money transfer charges.
The bank’s analysts estimate that Safaricom’s stock which is averaging at Sh35 a share could soar up to Sh40, but not more than that.
Mobile money licence
In a research paper, the bank says that the success of Safaricom in Ethiopia will be largely driven by how quickly the mobile money licence is issued, given the time it takes to roll out the infrastructure.
“As we update our estimates based on guidance and current situation, we continue to believe mobile money license is important for Safaricom to generate positive return on this venture,” CitiBanksaid.
Ethiopia suspended bids for a second telecommunication licence that was to include mobile money, stalling Safaricom’s hopes to launch M-Pesa in the country.
The Ethiopian Communication Authority (ECA) said through a notice dated December 22 that it had cancelled the plan to offer the new telecoms licence following requests from interested parties.
Ethiotel, the local player has the advantage because it had already launched mobile money services last year and reported more than 6 million users mid last year.
CitiBank’s perspective is important because Safaricom stock is largely driven by foreign investors who rely on international institutions to make investments in the local market.
According to Citi, the only advantage Safaricom could have in the landscape is mobile money, and hence it has a bearing on its success in Ethiopia given the huge capital it is about deploy.
CitiBank estimated that the Safaricom Ethiopia operations will need investment of about Sh400 billion to roll out its infrastructure. “Currently we assume operations will be financed by USD debt with a low cost of debt around 6 percent. However, given the risk profile of these operations and inflation in Ethiopia, we believe the cost of debt (both foreign and local) to be much higher,” CitiBank said.
The US lender believes that an improvement in the political environment in Ethiopia and the issue of mobile money licence is the fuel that will determine the stock price of East Africa’s most valuable firm in.
Currently, Safaricom is pushing for Communication Authority (CA) decision to cut the rate that telcos charge each other for interconnecting customers from Sh0.99 to Sh0.12, be declared invalid and set aside.
Safaricom is also under immense pressure to cut money transfer fees from the public. Reports show that Treasury is also pushing for reduction in mobile money fees given that M-Pesa handles an estimated 40 per cent of Kenya’s gross domestic product (GDP).