Safaricom (SCOM): Ethiopia’s Gambit and the Dividend Dilemma

Business Snapshot

Picture this: Safaricom is Kenya’s financial backbone, the telco that powers everything from your M-Pesa payments to your late-night Mziki Mix playlist. But here’s the twist—Safaricom isn’t just betting on Kenya anymore. It’s gone all-in on Ethiopia, a market where the potential is massive (3.0 million customers and counting) but the losses are, well, massive too. The company’s FY’23 results show M-Pesa revenue grew by 8.82% to KES 117.19 billion, proving that even in tough times, Kenyans can’t resist the convenience of tapping their phones to pay for ugali at the local kiosk. Meanwhile, voice revenue took a hit from reduced Mobile Termination Rates (MTR), forcing customers to get creative with their calling habits. And let’s not forget the competition—Starlink is circling like a vulture, promising faster internet but with a price tag that’ll make your wallet cry. Safaricom’s moat? It’s not just about infrastructure; it’s about trust. Kenyans trust M-Pesa with their savings, their loans, and their chai money. That’s a competitive advantage you can’t buy.

Financial Performance

FY’23 was a rollercoaster. Revenue grew by 4.30% to KES 310.90 billion, but profit after tax (PAT) took a nosedive, dropping 22.24% to KES 52.48 billion. Why? Ethiopia. The expansion there cost KES 96.10 billion in capex, and the shilling’s depreciation didn’t help. Operating expenses ballooned by 34.24%—blame inflation, energy costs, and the fact that launching a new market is expensive. Even M-Pesa, Safaricom’s golden child, saw its active users grow by just 0.91% to 33.11 million, a far cry from the explosive growth of yesteryears. The final dividend was slashed to KES 0.62 per share, bringing the total FY’23 payout to KES 1.20—still generous, but a clear signal that the good times aren’t what they used to be. The stock’s 12-month performance? A brutal -51.32%, because investors aren’t thrilled about Ethiopia’s cash-burning ways.

Valuation Lens

At a P/E of 9.48x, Safaricom looks cheap compared to frontier peers at 12.50x. But cheap doesn’t always mean good. The stock’s P/B ratio of 3.14x is a far cry from the 9.82x it commanded in FY’22, reflecting the market’s skepticism about Ethiopia’s long-term profitability. The dividend yield of 3.98% is decent, but with PAT declining and capex eating into cash flow, can Safaricom keep paying out KES 1.20 per share without stretching itself too thin? The answer lies in Ethiopia’s breakeven timeline—currently pushed to FY’27—and whether Kenya’s core business can offset the losses. If Ethiopia stabilizes and M-Pesa keeps growing, the stock could be a steal. If not? It might be a value trap dressed in a shiny dividend.

Risks

Ethiopia is the big, hairy, unpredictable risk. The Birr’s depreciation alone cost Safaricom KES 17.5 billion in FY’23, and competition from Ethio Telecom (the state-backed incumbent) is fierce. Then there’s the shilling—still weakening, still making imports and debt more expensive. High inflation in Kenya is squeezing disposable income, which means less spending on data and voice services. Regulatory pressure isn’t helping either; reduced MTRs are hammering voice revenue, and Starlink’s satellite internet could disrupt Safaricom’s data dominance. And let’s not forget the elephant in the room: Ethiopia’s losses are expected to peak in FY’24. If that peak turns into a plateau, Safaricom’s shareholders might start asking tough questions.

Rates & Liquidity Context

The Central Bank of Kenya (CBK) has been hiking rates to tame inflation, which means borrowing costs are up. Safaricom’s finance costs rose by 10.06% to KES 7.09 billion in FY’23, a direct hit to profitability. But here’s the kicker: Safaricom is still relying on debt to fund its Ethiopia expansion. With T-bill yields climbing, the cost of capital is rising, and that’s before we even talk about the shilling’s volatility. If the CBK keeps rates high to defend the currency, Safaricom’s debt burden will only get heavier. The good news? Safaricom’s strong cash flow from Kenya’s operations provides a buffer. The bad news? That buffer is getting thinner by the quarter.

What To Watch

1. Ethiopia’s breakeven timeline: If losses peak in FY’24 as management expects, keep an eye on EBITDA trends. Any delay beyond FY’27 could spook investors.
2. M-Pesa’s growth: The resumption of wallet-to-bank charges and global payments growth could offset voice revenue declines. Watch transaction volumes and ARPU trends.
3. Dividend sustainability: With a payout ratio of 77.42%, Safaricom is still generous, but rising capex and debt costs could force a cut. The next dividend declaration will be a key signal.
4. Shilling stability: Any sharp depreciation will hit FX losses and debt repayments. Watch CBK interventions and forex reserves.
5. Regulatory changes: Reduced MTRs and potential excise duty hikes could further pressure voice revenue. Any policy shifts will move the needle.

FY’24 earnings are around the corner. If Ethiopia’s losses widen or Kenya’s macro environment weakens, the stock could face another leg down. But if Safaricom can stabilize Ethiopia and keep M-Pesa humming, the dividend might just hold—and that’s what keeps the bulls (and income investors) interested.

Informational only, not investment advice.