Will troubled Safaricom spin off M-Pesa?

Safaricom’s share lost more than a third of its value during last year’s bear markets. Now the Kenyan telecom operator has replaced its head of the financial services division. Could the move lead to the spin-off of M-Pesa? This week, we look at what a spin-off could mean for Safaricom.

Capital News Africa: From the trading floor – Week 6-2023

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On the Nairobi Securities Exchange (NSE), investors are cheering the news that Kenya telecom provider Safaricom (ISIN: KE1000001402) has replaced a top manager. Last week, Safaricom CEO Peter Ndegwa announced that Esther Masese Waititu would take over as the company’s new head of the financial services division. Waititu, who begins her job later this month, was formerly head of corporate banking at KCB, the Kenyan bank group (ISIN: KE0000000315).

The announcement came as a big surprise, as Waititu’s predecessor, Boniface Mungania, was only appointed head of this department in last summer. After a few months, Mungania was transferred and made “Director of Public Sector Digital Transformation.” As such, he is charged now with assisting both the government in Nairobi and the county governments in the digital transformation effort.

Safaricom rallies on Waititu’s appointment

Now Mungania is out of the financial services department and news of Waititu’s appointment lifted Safaricom’s share 5.2% to KES 24.45 (EUR 0.1826) in heavy trading last week. The rally added EUR 390 million to Safaricom’s market capitalisation.

But while investors are giving Waititu advance praise, she has a tough job ahead of her. One of her key tasks is to reinvigorate Safaricom’s mobile money unit M-Pesa, which is looking increasingly outdated when compared with African fintechs.

A spin-off of M-Pesa would benefit Safaricom

Waititu’s appointment also prompts the question: Could M-Pesa be spun-off? We think this would be a wise next step. Given both its brand recognition and Waititu’s restoration, Safaricom could use the proceeds to invest more heavily in its core telecoms business.

Incidentally, we are not behind this speculation. Rather, it comes from a prominent Kenyan official, namely Patrick Njoroge, Governor of the Central Bank of Kenya. Njoroge is convinced that M-Pesa will be spun off – although he thought the announcement would happen last month.

But again, even if an IPO or a sale for M-Pesa does not materialise, Waititu will have to make the mobile money unit more competitive amid the fintech threat. How difficult that job is can be deduced by the fact that her predecessor was in the job for just a couple of months.

Safaricom’s share has woefully underperformed

Moreover, the recent rally in its stock cannot hide the fact that for the past twelve months, Safaricom woefully underperformed. Investors had to bear a loss of almost 36% during a period where African equity markets held up well amid bearish markets in the US and Europe.

On the other hand, the decline in Safaricom’s share has brought its valuation to a more reasonable level. Safaricom’s price-to-earnings (P/E) ratio is now 15.2 based on 2023 earnings compared with 21.2 for 2021. Its dividend yield stands now at 5.3%.

Although these figures are positive, analysts for Safaricom are still sceptical about Safaricom’s fortunes. They see limited earnings potential for the company and believe that, as a result, the share is still too expensive. Safaricom’s past earnings statements have also disappointed, falling below analysts’ projections.

We certainly hope that Waititu can help turn M-Pesa and Safaricom around. For a prolonged slump in its share would hold down Kenya’s stock market generally. This is simply because Safaricom, with a market cap of EUR 7.8 billion accounts for about 60% of the NSE’s total market cap.