Rising Competition And Regulation Will Pressure Mobile Money Margins Over The Coming Years

Catalysts

About Safaricom

Safaricom operates integrated connectivity and mobile financial services platforms in Kenya and Ethiopia, with M PESA at the core of its business model.

What are the underlying business or industry changes driving this perspective?

• Intensifying digital financial services and merchant acquiring competition in East Africa risks eroding M PESA’s pricing power just as Kadogo style low value free transactions rise. This places structural pressure on payments revenue growth and overall net margins.
• Rapid data usage growth and migration to 4G plus and 5G requires sustained high capital expenditure and spectrum investment. Combined with flattening voice and SMS, this could compress returns on invested capital and slow earnings growth.
• Heavy strategic dependence on AI driven customer targeting, fraud management and pricing leaves Safaricom exposed to rising compliance, cybersecurity and infrastructure costs as regulation tightens. These may offset operating leverage gains and limit margin expansion.
• Ethiopia’s continued currency depreciation, delayed tariff repair and mandated integration into the broader digital payments ecosystem threaten the viability of premium data and M PESA propositions. This could potentially prolong losses and dilute group earnings.
• Shifts in regulation and taxation around mobile money, digital credit and cross border payments, combined with government fiscal needs, create a rising risk of higher levies on high growth M PESA verticals. This may directly constrain service revenue growth and net income.

Assumptions

This narrative explores a more pessimistic perspective on Safaricom compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Safaricom's revenue will grow by 12.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 18.1% today to 22.3% in 3 years time.
• The bearish analysts expect earnings to reach KES 123.2 billion (and earnings per share of KES 3.31) by about December 2028, up from KES 69.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from 16.1x today. This future PE is greater than the current PE for the KE Wireless Telecom industry at 16.2x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.55%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Safaricom is delivering robust growth in its core Kenya market, with service revenue up 9.3% and net income up 22.6% year on year. If this performance is sustained, it could support a re rating of the stock and higher long term earnings and cash flows.
• The company is successfully scaling high growth digital and financial services such as M PESA, super apps and fixed broadband. M PESA now contributes nearly half of service revenue and is growing in higher value credit and merchant payments, which could structurally lift revenue and net margins over time.
• Heavy investment in AI, cloud native Fintech 2.0 and future ready tech platforms is already improving fraud detection, pricing, customer targeting and network efficiency. This may reduce operating costs and support expanding margins and earnings over the long term.
• Ethiopia, despite current losses and currency headwinds, is rapidly scaling with over 11 million active customers and nearly tripling local currency service revenue. It could become a major second profit pool that materially boosts group revenue and earnings once pricing and FX conditions normalize.
• Disciplined capital allocation, declining group CapEx, stable OpEx intensity and an improving net debt to EBITDA ratio indicate strong financial resilience. This could underpin sustained dividend capacity and support the share price through steadier free cash flow and earnings visibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Safaricom is KES24.8, which represents up to two standard deviations below the consensus price target of KES33.19. This valuation is based on what can be assumed as the expectations of Safaricom's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of KES43.0, and the most bearish reporting a price target of just KES24.8.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be KES552.7 billion, earnings will come to KES123.2 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 26.6%.
  
• Given the current share price of KES28.05, the analyst price target of KES24.8 is 13.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.