Safaricom PLC 1H20 | Earnings Update

Safaricom announced 1H20 results this month. Revenues were in line with expectations, with M-Pesa and fixed data growing at double-digit rates y/y. Service revenues grew 5.3% y/y to KES 124.32bn driven by robust growth in M-Pesa (+18.2% y/y and the rapidly growing fixed data revenue (+18.4% y/y). We maintain our target price of KES 32.27. The share price closed at KES 29.75 on 31st October.

Key performance themes:

Service revenues grew by 5.3% y/y to KES 124.32bn.

This was supported mainly by M-Pesa and fixed data, which grew by 18.2% and 18.4%, respectively. On the other hand, mobile data revenue grew by 4% y/y. Voice revenue declined by 1.4% y/y while messaging revenue declined by 11% y/y. Overall, total revenue rose by 5.8% to KES 129.9bn.

M-Pesa revenue was up 18.2% y/y to KES 41.97bn.

M-Pesa’s contribution to total service revenues increased to approx. 33.8% in 1H20 (FY19A: 31.4%). Average revenue per user (ARPU) was up 5.3% y/y in 1H20 while the 30 day active M-Pesa users rose by 12.4% y/y to 23.61mn. New business grew by 32.1% y/y with the main key drivers as; Fuliza, Mshwari, KCB M-pesa. Going forward, we expect M-Pesa revenue growth to be supported by the following; i) new business growth, ii) increased subscription and active usage and iii) effective pricing and marketing strategies.

Fixed service revenue grew by 18.4% y/y to KES 4.55bn.

The continuous effort to invest in fiber network coverage is paying off. A keen focus has shifted to data as evidenced by the huge investments on fiber network coverage. As at 1H20, the highest contribution (11.1%) to fixed service revenue came from fibre to home (FTTH). Fixed service revenue now contributes 3.7% to service revenue. As at 1H20, approx. 302,900 homes have fibre coverage while close to 114,700 home are connected with fiber network coverage. We still see scope in the fibre infrastructure space for Safaricom and this will be through organic growth. As June 2019, Safaricom’s fixed service subscriber’s market share stood at 32.7%, coming second after Wananchi Group (34.8%).

Mobile data revenue grew by 4% y/y to KES 19.78bn.

Despite subdued growth, mobile data now accounts for 15.9% of service revenue. Notably, our average revenue per user declined by 9.3% to KES 179.07 while consumption of data per user rose significantly by 43.6% to 919mbs. The management intimated that the key focus in the next months is on 4G rollout across the country. As at 1H20, Safaricom increased the number of 4G by 49.7%, adding 732 sites, with the coverage reaching 63%. The telco operator will ride on; i) its wide network coverage (4G at 63%) and ii) new strategies to increase data consumption, for instance the recently introduced ‘no expiry bundle’ package.

Voice and SMS revenue now contributes 44.6% of the service revenue.

Voice revenue declined by 1.5% y/y to KES 46.87bn, attributed to the decline in ARPU (-8.8% y/y). Safaricom market share in voice stood at 56.8% as at June 2019. On the other hand, SMS revenue declined by 11% y/y to KES 8.6bn the decline in ARPU (-15.9% y/y). Safaricom dominated with a market share of 95.4% as at June 2019.

EBITDA margin settled at 51.3%. EBITDA stood at KES 66.49bn

This was driven by the company’s unique cost