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Safaricom share price record jumps the gun as Ethiopia risks remain

By David Whitehouse
Posted on Thursday, 27 May 2021 11:31

Safaricom CEO Peter Ndegwa . Company photo.

Shares in Safaricom surged to a record this week after the Ethiopian telecommunications license win for the consortium it leads. Analysts question whether the market is underestimating the risks involved.

The consortium which won the license with a bid of $850mn includes Safaricom, its parent firms Vodafone and Vodacom, Britain’s CDC Group and Japan’s Sumitomo Corporation. Safaricom CEO Peter Ndegwa reacted by saying the company aims to become a competitor in the Ethiopian market, rather than a stakeholder in state-owned Ethio Telecom.

The political risks of setting up operations in Ethiopia are not reduced by a license award. The fact that Ethio is the sole telecoms provider has made it easy for the government to shut down the internet when politically convenient, such as after the murder of musician Hachalu Hundessa last year. The country remains racked by armed conflicts in the Tigray and Oromia regions.

Other companies which had expressed initial interest in bidding for a license, such as Etisalat, Orange, Saudi Telecom, Axian and Telkom, eventually stayed on the sidelines.

“Ethiopia is an important frontier but considering the time and cost of setting up and the ongoing reforms, there will be some initial delays and other political and market challenges,” says Lisa Kimathi, senior associate at Standard Investment Bank in Nairobi. “Revenue will not be immediate.” Still, Kimathi says, the Ethiopian government is very keen to liberalise the sector as part of transforming into a market economy and would not want to lose foreign investment.

Sarah Wanga, head of research at AIB Capital in Nairobi, is positive about Safaricom’s overall prospects, noting that Ethiopian entry will increase the size of the company’s market.

  • But Safaricom will be “a new player in the market and will have to struggle to gain market share,” she says.
  • More information is needed about the company’s strategy in Ethiopia, and it’s possible that political risk and the possibility that Safaricom could reduce dividends as it invests in Ethiopia, are not being factored in by the market, she says.

Low tariffs

Safaricom shares ended trading at KSh.41.80 ($0.39) on Wednesday, giving a price to earnings ratio of 24. The stock is currently trading “above fair value” says Renaldo D’Souza, head of research at Sterling Capital in Nairobi. The price is being driven by sentiment rather than fundamentals, he adds.

  • Sterling Capital sees fair value at KSh.37.59 ($0.35).
  • The firm rates the shares as hold, and D’Souza says investors should wait for a pullback below KSh.40 ($0.37) before considering any purchase.

“The market is clearly assuming a successful launch, which is likely to take many years to prove,” says Alastair Jones, global emerging markets telecoms analyst at New Street Research in London.

The share price move after the announcement implies the Ethiopian new entrant opportunity is worth $2.2bn, of which Safaricom shareholders are set to get a 56% share, Jones calculates. He points to Myanmar in southeast Asia as an example of the scale of execution risk for new market entrants.

  • Telenor saw a peak funding loss of $400m in Myanmar, whereas Ooredoo losses accumulated over five years to reach $1.2bn, he says.
  • “Ethiopian tariffs are a fraction of those in Myanmar, so the revenue required to offset the operating losses, and upfront license fee, will be much harder to come by,” Jones says.
  • “Execution risk is therefore very high, and with the market assuming near perfect execution, Safaricom management have a lot to prove.”

Bottom line

Investors are pricing in smooth progress, but much can still go wrong for Safaricom in Ethiopia.

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