Fintech Expansion And Rising Data Usage Are Expected To Drive Long-Term Upside

Catalysts

About Safaricom

Safaricom is a purpose-led technology company that delivers mobile connectivity and digital financial services in Kenya and Ethiopia.

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

• Scaling of Fintech 2.0 and the M-PESA super app, including new features like shared wallets, split payments and merchant lending, is expected to deepen ecosystem stickiness and increase payments and credit revenue, lifting group service revenue and fee-based earnings.
• Rising 4G and 5G smartphone penetration, combined with youth-focused propositions such as B-Live and AI-driven customer value management, is likely to support Mobile Data growth and increase average usage per user, contributing to top line expansion and higher data margins.
• Acceleration of digital payments and merchant acquisition in Kenya, with over 2.4 million merchants and growth in Pochi la Biashara, positions Safaricom to capture more consumer and MSME spend, supporting higher transaction volumes and M-PESA contribution to net income.
• Scale-up of Safaricom Ethiopia, with over 11 million active customers, significant data usage and expanding Voice monetization, together with regulatory progress such as EthSwitch integration, may help Ethiopia shift from a drag to a growth engine, supporting consolidated revenue growth and narrowing group losses.
• Expansion in fixed broadband and fixed wireless access, alongside pay-as-you-go models and partnerships, allows Safaricom to serve rising home and enterprise data demand, supporting recurring revenue and improving overall EBITDA margins through better network utilization.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Safaricom's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.1% today to 23.0% in 3 years time.
• Analysts expect earnings to reach KES 120.4 billion (and earnings per share of KES 3.09) by about December 2028, up from KES 69.8 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the KE Wireless Telecom industry at 16.0x.
• 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?

• Persistent pressure on customer disposable incomes in Kenya, driven by a high cost of living and global trade disruptions, could slow growth in usage of both connectivity and M-PESA services, limiting service revenue expansion and constraining earnings growth over time.
• Regulatory and pricing challenges in Ethiopia, including delayed market repair and mandated industry pricing that does not reflect rising foreign currency costs, may force Safaricom to sell services below economically sustainable levels, weighing on net margins and delaying the path to breakeven earnings.
• Accelerating currency depreciation in Ethiopia and continued weakness of the Kenyan shilling against major currencies could inflate operating and financing costs relative to local currency revenues, eroding group profitability and putting downward pressure on net income.
• Rising competition and regulatory scrutiny across mobile money, digital payments and connectivity in both Kenya and Ethiopia could limit Safaricom's ability to reprice, differentiate and grow its ecosystem, compressing revenue growth and reducing long term operating margins.
• Execution and cyber related risks associated with rapid AI and Fintech 2.0 deployment, including potential fraud, service outages or data governance failures, could undermine customer trust in M-PESA and digital services, reducing transaction volumes and dampening fee based revenue and earnings growth.

Valuation

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

• The analysts have a consensus price target of KES33.31 for Safaricom based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2028, revenues will be KES523.0 billion, earnings will come to KES120.4 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 26.6%.
  
• Given the current share price of KES27.95, the analyst price target of KES33.31 is 16.1% higher.
  
• 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.