Safaricom faces renewed M-Pesa spin-off pressure

Thursday, September 29th, 2022 04:00 | By
Safaricom CEO Peter Ndegwa
Safaricom CEO Peter Ndegwa. PHOTO/Courtesy.

Calls for the spin-off of M-Pesa from its parent company, Safaricom have grown louder after the fintech company nearly topped Sh100 billion in revenues with analysts saying it will unlock more value for shareholders. Analysts say the mobile banking service has a clear growth trajectory, adding that keeping it under the telco category could create a growth ceiling.

“Beyond unlocking new growth areas, spinning off and listing M-Pesa will unlock more value for Safaricom shareholders. Consequently, shareholders have the next 12 months to make this consideration, otherwise they will have missed an important valuation window,” analysts at Genghis Capital said during a briefing to investors.

When the Central Bank of Kenya (CBK) Governor Patrick Njoroge was asked about the issue last week he said: “Ask me that question next year.”

Official proposal

Safaricom chief executive Peter Ndegwa, however, say there is no official proposal from the regulator to separate M-Pesa.

The calls come after M-Pesa revenue topped Sh93.6 billion ranking over several top tier banks in the country and positioning as a major player should it acquire a banking license. “In our view, M-Pesa presents a more elastic valuation trajectory compared to the traditional voice business, and a spin-off presents significant upside,” said Genghis Capital in a report.

“Continuing to embed M-Pesa to Safaricom’s voice business creates a long-term growth ceiling. We think M-Pesa as a platform can deliver more when released into the blue-sky. A spin-off unlocks all these,” said the investment bank. M-Pesa revenue growth story has been a near diagonal curve rising from Sh2.5 billion in 2009 to Sh93 billion except for the year 2020 when CBK waived charges to reduce the cost of living. Indeed, a sustained drive towards cashlessness and the growing re-imagination cross-border payments will continue to entrench utilisation in the long run.

“M-Pesa hit almost $1 billion in revenues in the last financial year. What valuation would this one fetch as a standalone,” posed Mwango Capital, a financial research firm, triggering reactions on social media. “From our valuation, M-Pesa stands at a fair value of Sh646.8 billion ($5.6 billion),” said Wesley Manambo of Genghis.

As per Genghis, M-Pesa’s enterprise value is nearly double that of Flutterwave, dubbed Africa’s unicorn. Furthermore, the back-of-the-envelope calculations indicate that M-Pesa will unlock a listing premium north of $3 billion, placing the business’ fair value estimate at Sh1trillion ($10 billion).

“Our strong enterprise value compared to earnings before income tax and depreciation and amortisation forecasts underpins the estimate as they implicitly point to a healthy price to earnings and price to book multiples,” said Manambo. “We also know that markets have been willing to premiumise fintechs. And M-Pesa will be no exception to that premiumisation.”

Central Bank of Kenya has issued a discussion paper on Central Bank Digital Currency’s (CBDC) for public comments.

“We have studied the notes and believe that the Central Bank Digital Currency’s entry into the Kenyan payment ecosystem will kick start an organic downswing in transaction costs,” said Manambo.

“We attribute this to users having an alternative to transact peer-to-peer payments at cheaper rates.” Revenue for the service in the year ended March 31, 2022 stood at Sh107.7 billion having grown by 30.3 per cent from Sh82.6 billion in 2021.

The growth in revenues is largely attributable to the full return of fees and transactions of up to Sh1,000 which only returned in January 2021 after a nine-month pause.

Personal payments were up by 30.3 per cent to include a recovery of 55.4 per cent on payments. At the same time, business payments soared by 37.2 per cent year over year with earnings from Lipa Na Mpesa (LNM) rising the highest at 60.9 per cent.Global payments meanwhile rose by 22.9 per cent in the period with growth in international money remittances at 23 per cent.

Data revenue

 Safaricom also recorded an 8.1 per cent growth in mobile data revenue to Sh48.44 billion attributed to tailoring of data offers to each customer and a drop in data charges with the average rate per megabyte dropping 31.2 per cent to 8.88 cents during the year.

The telco’s voice revenue grew marginally by 0.8 per cent to Sh83.21 billion while messaging revenue dropped 20 per cent to Sh10.87 billion due to stiff competition from the continued growing use of internet-based messaging apps such as WhatsApp.

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