Safaricom | Exiting the trough

Safaricom's H1'20 results highlighted the benefits of its diversified revenue streams which offset weakness in telecom revenues (voice: -1.%, SMS: -11%, data:+4%). Despite the weakness, EBITDA margins expanded 90bps. M-Pesa contributes 34% of service revenue and creates capacity for the Group to invest. A mix change to higher margin digital transactions that do not incur agent commissions expands M-Pesa's contribution margin. M-Pesa's contribution margin has increased 480bps since H1'17. We expect the FY'19 M-Pesa revenue base to double in five years as higher smartphone penetration from the Group's 4G investments maintain digital transactions growth.

Safaricom is also positioning itself to invest in Ethopia, the last unpenetrated global mobile market. Safaricom will probably partner with Vodacom to improve the affordability of the market entry. Safaricom's M-Pesa success, close proximity to Ethiopia, cashflow generation (EBITDA margin – capex intensity: 34.9%, VOD: 23.9%, MTN: 16.6%) and an unlevered balance sheet should enable the Group to afford the c.USD1bn entry price and the intensive capex outlay to establish a network. We estimate a potential value of KES4ps (USD1.6bn) from an entry into Ethiopia for Safaricom, with potential further upside from M-Pesa's services.