Safaricom needs to regain momentum

Safaricom has appointed a new chairman of its board. The news comes at a time when the Kenyan telecoms giant has disappointed in terms of its earnings and its stock price. Meanwhile, Safaricom is being challenged by fintechs in its key mobile payments business. Can the company’s new leadership turn the company around?

Capital News Africa: From the Trading Floor – Week 32-2022

The news dominated the headlines in Kenya: On 1 August, Safaricom (ISIN: KE1000001402), the biggest company traded on the Nairobi Securities Exchange (NSE), appointed John Ngumi as its new chairman of the board. By recruiting Ngumi, Safaricom has completed the changing of the guard at the top.

In April 2020, Peter Ndegwa took over as CEO after his predecessor Bob Collymore died of cancer the year before. Ndegwa has had very big shoes to fill: During his tenure, Collymore invented the mobile money payments system M-Pesa, which revolutionised banking in Africa and made Safaricom one of Africa’s best-known brands. Safaricom’s success also helped elevate it to the biggest member of the NSE with a market cap of KES 1,206 billion (EUR 9.9 billion). Indeed, Safaricom alone accounts for two-thirds of the NSE’s total market cap.

Weak fundamentals

Recently, however, Safaricom has disappointed investors in terms of earnings growth and its share price. Consider that in the last twelve months, its share price has shed 28.5%. And this is not just due to the Covid-19 pandemic, but also due to analysts’ views of its operating results.

In the past year, analysts have significantly revised downwards their profit estimates for Safaricom because of weak fundamentals. And in the past four months, they have lowered their average price target significantly. Their price target is now at KES 35.75 or 20% under the current share price of KES 30.10 (EUR 0.2478). Some analysts have even set a price target of just KES 21.50, which is 30% below the current share price.

Big dividends for the Kenyan government

On the other hand, the Safaricom share is still a performer if the long view is taken. In the last decade, its share price has risen 682%. This has made two of its biggest shareholders very happy – namely UK telecoms giant Vodafone (39.9% stake) and the Kenyan government (35% stake). Safaricom’s last reported profit stood at KES 69.6 billion (EUR 573 million). As its dividend totalled KES 1.39 per share, the Kenyan government earned KES 19.5 billion (EUR 161 million) from its stake in the company.

But back to Safaricom’s new leadership, which can hopefully invigorate the company and its share price. CEO Ndegwa is from Kenya, having studied at the University of Nairobi and then getting an MBA from the University of London. The 52-year-old manager began his career at UK spirits and beer giant Diageo, where, prior to joining Safaricom, he was managing director for Continental Europe and Russia.

Expert on consumer markets

Although Ndegwa did not have much experience with telecoms, what he did bring to the table was his profound knowledge of consumer markets. Soon after his appointment, Ndegwa named three areas of growth for Safaricom that he wanted to focus on: M-Pesa, the data business and entry into the Ethiopian market. More than two years later, Ndegwa can point to having fulfilled the latter. Safaricom is active in the Ethiopian market, which has 112 million citizens – or more than double Kenya’s 47 million. Regarding the data business, Ndegwa wants Safaricom to provide more internet-based solutions to sectors such as healthcare, education and agriculture.

But Ndegwa’s biggest challenge remains thwarting the challenge posed to Safaricom’s M-Pesa mobile payments system. When Bob Collymore introduced the technology in 2007, M-Pesa was based on text messages. M-Pesa was quite an innovation, transforming the mobile account that users had with Safaricom to a payments service. As a result, Kenyans without a bank account could transfer money from their Safaricom account, pay into it or withdraw cash from licensed kiosks in the country.

Today, M-Pesa works with smartphone apps instead of text messages. But that is where Safaricom is vulnerable. Many developers in Kenya’s fintech scene are creating payments apps that seek to simplify and improve the process. Should they succeed, M-Pesa could be considered to be dinosaur technology and largely shunned.

Answering the fintech challenge

Naturally, Safaricom’s investors are expecting the company’s new management to explain how it is dealing with the new competition from fintechs and how it will recapture lost markets to competitors Airtel Africa and Telkom Kenya.

Safaricom’s traditional competitors are no slouches. In an effort to challenge Safaricom’s predominant position, Airtel Kenya and Telkom Kenya - the country’s respective second and third-biggest telecom operators - announced a merger in 2019. Although the tie-up failed in February 2021, both companies have been gaining ground against the market leader. Safaricom’s share of the Kenyan market has fallen to 67.8% from 79.6% in June 2017.

Ngumi takes over from Sitholizwe Mdlalose, who has joined Vodacom Tanzania as that company’s new CEO. The banker is very well connected in Kenya, having founded the investment banks Eagle Africa Capital Partners and Loita Capital Partners Kenya. His contacts should help Safaricom build out its data business. Ngumi has also been involved with infrastructure, having helped realise projects like Konza Technopolis and the Kenya Pipeline. That said, investors will still be looking for further growth of the M-Pesa business and how Safaricom deals with the competition from fintechs.

Safaricom’s revenues also will likely be impacted by an agreement the company made with the Kenyan telecom regulator on 8 August. According to the agreement, Safaricom must cut its mobile termination rate (MTR) to KES 0.58 per minute from KES 0.99 per minute previously. Estimates are that the move will cost the company KES 1.5 billion (EUR 12.4 million) in annual revenue. Safaricom CEO Ndegwa and Chairman Ngumi definitely have their work cut out for them.