SAFARICOM LTD EARNINGS UPDATE MAY 2016

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Mervin Gardner
6 years ago
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SAFARICOM LTD EARNINGS UPDATE MAY 2016 A I B C A P I T A L L T D We maintain our target estimates and only adjust for time value of money and debt on the valuation.

1 SAFARICOM LTD EARNINGS UPDATE MAY 2016 A I B C A P I T A L L T D We maintain our target estimates and only adjust for time value of money and debt on the valuation. We also factor in current numbers and 2017 EBITDA estimates in our EV/EBITDA multiple. Our target prices therefore change to KES from KES on DCF and KES from KES on EV/EBITDA giving us an average target price of KES 16.05, which represents a 6.1% downside from the current price of KES We therefore maintain a HOLD recommendation. Key Performance and Financial Highlights (Year ended 31 st March 2016) Service revenue growth of 13.8% to KES bn. 7.8% increase in total customer base to 25.2 m. Voice service revenue grew by 3.9% to KES 90.8 bn. Messaging (SMS) revenue grew by 10.6% to KES 17.3 bn. M-PESA revenue increased by 27.2% to KES 41.5 bn. 19.8% increase in 30 day active M-PESA customers to 16.6 m. 42.7% growth in mobile data revenue to KES 21.2 bn. 21.5% increase in 30 day active mobile data customers to 14.1 m. Fixed service revenue growth of 22.0% to KES 3.8 bn. 16.7% growth in EBITDA to KES 83.1 bn with an EBITDA margin of up 0.9 ppt. Net Income increased by 19.6% to KES 38.1 bn. Key Statistics Bloomberg Ticker SAFCOM.KN Current price (KES) Target price (KES) Downside -6.14% Div. Yld 4.50% TSR -1.64% ROE 32.6% 52 Week range Mkt cap ($mn) 6,871 Shares outstanding (mn) 40,065 Year end 31st March Competitiveness Subscriber market share of 64.7%, mobile penetration in Kenya now stands at 87.7% The network continues to deliver the best voice quality and faster data services Operating efficiencies maintaining bottom line profitability growth; operating expenses as a % of total normal revenue remain unchanged at 22.1%. Non-voice service revenue increased to 48.9% of total service revenue from 44.1% driven by m-pesa and data. Valuation The target prices were arrived at using the average of 2 valuation methodologies; a 4 year discounted Cash flow and an EV/EBITDA multiple valuation. The tables below show the 2016 estimates versus actual performance indicating a within the range variation of between 1% and 10% of the key valuation estimates. We therefore maintain our estimates. Our DCF target price however changes to KES from KES as we adjust for debt and time value of money. Our EV/EBITDA target price also changes to KES from KES as we factor in the current EV/EBITDA and a 2017 estimate.

2 Financial Summary (Key ratios) 2015A 2016E 2016A Var (%) 2017E 2018E 2019E Revenue (KES bn) % EBITDA 43.3% 44.5% 44.6% -0.2% 45.0% 45.0% 45.0% EBIT 27.6% 28.8% 28.2% 2.1% 30.0% 31.0% 32.0% Net 19.1% 20.3% 19.5% 4.1% 21.0% 22.0% 23.0% EPS % Key estimates Depreciation % Capex % Working capital inv % Key drivers estimates. KES "bn" 2015A 2016E 2016A Var (%) 2017E 2018E 2019E Voice % Messaging % Mobile data % Fixed service % M-pesa % Other service revenue % Service Revenue % Handset & other revenue % Construction revenue Total revenue % Direct costs % other expenses % EBITDA % Net Income %

3 DCF Valuation Equity risk premium 5% Risk free 11.00% beta 1.18 debt to total capital 10% equity to total capital 90% Cost of debt 12.25% Cost of equity 16.90% Tax rate 30% WACC 16.07% Terminal growth 5% E 2017E 2018E 2019E EBIT(1-T) 24,609 31,576 36,588 42,316 49,565 57,401 Depreciation and Armotization 21,281 25,570 28,400 30,500 31,500 32,500 Capex (27,781) (33,866) (29,930) (31,350) (30,716) (29,286) Working capital investments 1,304 4,093 2,522 2,920 3,536 3,797 FCFF 19,414 27,373 37,580 44,387 53,885 64,413 Terminal value 611,097 Total 19,414 27,373 37,580 44,387 53, ,510 Period Discount factor Present Value 37,580 38,999 40, ,565 Present Value of cashflows 557,934 Add Cash 8,501 Firm Value 566,435 No of shares 40,065 DCF per share EV/EBITDA multiple Enterprise value 668, target EBITDA 90,952 Current EV/EBITDA EV/EBITDA 7.35 Average EV/EBITDA 7.82 Target EV 711, Add Cash 8,501 Equity Value 719, No of Shares 40,065 Fair price 17.96

4 Company Peer comparison Country Mkt Cap ($bn) Revenue (Usd bn) EBITDA EBIT Net Div Yield ROE ROA EV/EBITDA EV/Sales P/E P/B MTN Group South A % 26.32% 10.68% 9.88% 14.70% 7.12% % Vodacom South A % 25.11% 16.39% 4.65% 58.13% 19.19% % Maroc Morocco % 30.29% 16.93% 5.70% 35.83% 10.53% % Safaricom Kenya % 29.62% 19.51% 4.38% 38.34% 21.86% Sonatel Senegal % 36.73% 22.39% 5.87% 31.76% 16.58% % Telkom South A % 9.18% 9.95% 3.88% 11.57% 7.74% % Telecom Egypt % 12.61% 24.60% 11.68% 10.94% 8.96% % Econet Zimbabwe % 20.62% 9.42% n/a 6.72% 5.78% % Average 41.18% 23.81% 16.23% 6.58% 26.0% 12.22% % Debt ratio

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