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Safaricom: Finding Long-Term Growth in Mobile Payments

April 19, 2014 | About:
Karen Rogers

Karen Rogers

1 followers

Since Safaricom (SCOM)’s 2007 IPO, the company has emerged as the leading telecommunications provider in Kenya and expanded its operations throughout East and Central Africa. Safaricom is a long-term investment for stock traders looking for a company with strong financials and innovative products that serves a largely untapped mobile market.

Comparative Financials

Safaricom posts respectable numbers and pays its stockholders regular dividends.

 

2013

2012

2011

Revenue

1,429,742

1,230,541

1,090,652

EBITDA

311,676

231,758

410,949

EBT

292,703

199,763

223,002

Net Profit

201,723

145,228

153,100

EPS

0.51

0.37

0.38

Dividend

0.36

0.25

0.23

Yield

2.37%

1.68%

1.53%

Filling a Need

In 2007, Safaricom launched the M-Pesa P2P system, giving Kenyans an easy inexpensive way to send money to relatives in rural areas and villages. Before then, Kenyans had to either wire the money or deliver the cash in person. With approximately 50% of sub-Sahara’s 1.1 billion people living on $1.25 a day or less, the traditional bank model did not work for these communities. Banks saw little profit in attracting rural and low-income Kenyans who did not have enough money to open a checking or savings account.

Mobile P2P Payments

Safaricom’s M-Pesa, which means Mobile Money in Swahili, turns a customer’s cell phone into a personal bank. When a customer signs up for M-Pesa, Safaricom provides a free downloadable app that works equally well on cheap cell phones and expensive smartphones. M-Pesa keeps a running balance of the customer’s available cash after every transaction. By entering a cell phone number, customers can instantly send and receive cash, or pay for purchases. Employers can pay their employees by uploading payroll data to the M-Pesa system for immediate disbursement.

Safaricom’s Market Edge

With low market shares of 19% and 9% respectively, rivals Bharti Airtel and France’s Orange telecommunications companies are dwarfed by Safaricom’s market dominance. At the close of 2013, Safaricom had 65% of Kenya’s mobile market customers, 77.5% of voice traffic and 72.6% of mobile data traffic for several reasons.

Safaricom is one of the most successful home-grown corporations in Kenya. Customers are fiercely proud of Safaricom and regard India’s Airtel and France’s Orange as outsiders. Airtel’s marketing decision to woo Safaricom customers by cutting airtime fees did not consider this important factor. In the end, Safaricom’s customers remained loyal and Airtel ended up raising its fees to the original rates and taking a loss.

Safaricom understands its target audience. The “Send Money Home” marketing campaign was specifically designed for Kenyans who wanted a low-cost method of sending money to relatives living in rural areas. M-Pesa appeals customers wanting an easy-to-use platform that works on cheap cell phones.

There are approximately 20,000 retail stores through Kenya with over half of them located in rural areas and villages. Unlike Airtel and Orange, Safaricom agents can have a store set up and running in even the most remote location. Since Kenya has a national ID system, customers can sign up, download the M-Pesa app and start P2P banking in minutes.

Potential Market Weaknesses

Political unrest in Kenya and in neighboring countries is the biggest threat to Safaricom’s growth. Although Kenya has one of the strongest economies and most stable governments in sub-Sahara Africa, religious, political and tribal disputes could slow Safaricom’s growth domestically and throughout Africa.

In additional, the high costs of operating a telecommunications company, inflation and new competitors could eat away at Safaricom’s profits. The company must continue controlling its costs or face raising its airtime rates to make up for decreased profits. The untapped sub-Sahara market is a magnet for competitors and the Communications Commission of Kenya continues to license new telecommunication companies to operate in Kenya.

Long-Term Growth Outlook

Safaricom’s long-term growth outlook is impressive. At present, the World Bank estimates that only 17 percent of sub-Sahara’s population has a cell phone. With Africa’s population expected to hit 2.4 billion by 2050, Safaricom is ideally positioned to substantially increase its M-Pesa P2P service and mobile customer base. To handle the current increasing traffic, Safaricom doubled its broadband capacity, making it the fastest network for data transfer in Central and East Africa. The company continues to heavily invest in equipment upgrades, mobile capacity and customer service.

Safaricom is a long-term trade with analysts’ ratings of outperform and hold. The stock trades on the Nairobi Stock Exchange under the symbol SCOM. US brokerage firms can purchase stock shares on behalf of their clients through the Nairobi Stock Exchange.


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