Safaricom’s M-PESA economics and margin pressures in a competitive landscape

Safaricom remains Kenya’s dominant telecom and mobile money operator, with M-PESA contributing over 40% of group revenue. In the fiscal year ending March 2025, M-PESA processed transactions for 35.8 million active users, a 10.5% year-on-year increase, driving a 15.1% revenue rise to KES 161.13 billion. This growth was underpinned by the resumption of bank-wallet transaction fees and higher usage volumes, though the service’s economics face pressure from regulatory interventions and competitive pricing dynamics. Mobile termination rate (MTR) cuts have already compressed voice revenue, while Ethiopia’s expansion has introduced significant capital expenditure without immediate returns. The Ethiopian subsidiary, now serving 3 million customers across 22 cities, reported a KES 19.39 billion loss in the first half of FY’25, pushing the break-even target to at least FY’27.

The company’s financial performance over the past year reveals a disconnect between revenue growth and profitability. Group revenue rose 11.2% to KES 388.68 billion in FY’25, crossing the USD 3 billion milestone for the first time. However, profit after tax grew only 10.8% to KES 69.79 billion, reflecting margin compression. Net profit margins have declined sharply from 26% in FY’21 to 11.8% in FY’25, driven by higher operating costs, Ethiopia-related foreign exchange losses, and elevated capital expenditure. M-PESA’s resilience has been critical, with revenue up 15.1% year-on-year, but the service’s transaction-based model remains vulnerable to regulatory changes and competitive pricing from smaller players. Safaricom’s dividend policy has remained stable, with a total payout of KES 1.20 per share for FY’25, unchanged from FY’24, though this represents a lower payout ratio than in previous years due to reduced profitability.

Safaricom’s operational metrics in Kenya highlight its market dominance. The company holds a near-monopoly in mobile money, with M-PESA accounting for over 90% of Kenya’s mobile financial transactions. In voice and data, Safaricom commands a 65% market share, though competitive pressures from Starlink and Iristel have intensified. The company’s Ethiopian operations, while still in investment mode, have reached 3 million customers, though capital expenditure for the subsidiary totaled KES 55.8 billion in FY’23 and remains elevated. Ethio Telecom, the state-backed incumbent in Ethiopia, poses the most direct competitive threat, leveraging its established infrastructure and government support. Safaricom’s valuation reflects these challenges, with analysts maintaining a hold rating and a target price of KES 16.60, offering modest upside of approximately 7.8% from current levels. The stock trades at a premium to emerging market telecom peers, justified by its cash flow stability but tempered by margin compression and regulatory risks.

Regulatory pressures remain a key risk for Safaricom, particularly around mobile money pricing and interconnection rates. The Central Bank of Kenya has signaled potential changes to mobile money transaction fees, which could further squeeze M-PESA’s margins. In Ethiopia, the regulatory environment is less predictable, with the government’s stance on foreign telecom operators still evolving. Currency volatility has also posed significant challenges, with the Ethiopian Birr’s depreciation contributing KES 17.5 billion in foreign exchange losses in the first half of FY’25 alone. Safaricom’s management has acknowledged these headwinds, pushing back the Ethiopia break-even target from FY’26 to FY’27 and warning of continued margin pressure. The company’s ability to stabilize Ethiopian operations and defend its Kenyan market share will be critical to reversing the profit decline observed in recent fiscal periods.

Safaricom’s financial performance in FY’25 was shaped by several key developments. Revenue growth was driven by a 25.6% year-on-year increase in M-PESA revenue and a 20.2% rise in mobile data revenue, reflecting higher transaction volumes and data usage. However, operating expenses surged 34.24% year-on-year, driven by Ethiopia-related costs and elevated capital expenditure, which reached KES 91.3 billion in FY’25, down slightly from KES 93.5 billion in FY’24. The Ethiopian subsidiary’s losses were exacerbated by a 106% depreciation of the Ethiopian Birr in the first half of FY’25, resulting in KES 17.5 billion in foreign exchange losses. Despite these challenges, Safaricom Kenya surpassed USD 1 billion in operational profitability, demonstrating the resilience of its core market. The company’s dividend policy remained consistent, with a final dividend of KES 0.65 per share declared for FY’25, bringing the total payout to KES 1.20 per share.

Looking ahead, Safaricom’s strategic priorities include stabilizing margins in Kenya and progressing toward profitability in Ethiopia. The company’s guidance for FY’26 includes expectations of lower inflation and interest rates, which could support disposable income and transaction volumes. However, the heavy capital expenditure cycle is not yet complete, with further investments required to expand the Ethiopian network. M-PESA’s expansion into Ethiopia, once fully operational, may provide a new growth driver, but the near-term focus remains on cost control and regulatory navigation. The dividend yield, currently around 5%, offers some downside protection, but the stock’s valuation already reflects its market leadership and cash flow resilience. Analysts note that Safaricom’s ability to manage regulatory risks and execute its Ethiopian turnaround will be pivotal in determining its long-term profitability trajectory.

The competitive landscape in Kenya’s telecom sector has evolved, with Safaricom facing increased pressure from new entrants. Starlink’s satellite internet services and Iristel’s aggressive pricing strategies have intensified competition in data and voice segments. In Ethiopia, Safaricom’s operations are still in the early stages, with the company having launched full commercial services in 22 cities. Ethio Telecom, however, remains a formidable competitor, leveraging its established infrastructure and government backing. Safaricom’s Ethiopian subsidiary generated KES 5.4 billion in revenue in FY’24, but the path to profitability remains uncertain, with the break-even target now pushed to FY’27. The company’s capital expenditure in Ethiopia totaled KES 46.2 billion in FY’24, reflecting ongoing network expansion efforts.

Safaricom’s financial resilience is underscored by its strong cash flow generation, though margin compression has raised concerns among investors. The company’s net profit margin declined to 11.8% in FY’25, down from 26% in FY’21, reflecting the impact of higher operating costs and Ethiopia-related losses. Despite these challenges, Safaricom’s dividend policy has remained stable, with a total payout of KES 1.20 per share for FY’25, unchanged from the previous year. The company’s ability to maintain its dividend amid margin pressures highlights its commitment to shareholder returns, though the lower payout ratio reflects reduced profitability. Analysts have maintained a hold rating on the stock, citing modest upside potential and ongoing regulatory and operational risks.

In summary, Safaricom’s near-term outlook is shaped by its ability to navigate regulatory challenges, stabilize Ethiopian operations, and defend its market share in Kenya. The company’s guidance for FY’26 includes expectations of macroeconomic improvements, such as lower inflation and interest rates, which could support transaction volumes and disposable income. However, the Ethiopian subsidiary’s path to profitability remains uncertain, with the break-even target now extended to FY’27. Safaricom’s dividend yield, currently around 5%, provides some downside protection, but the stock’s valuation already reflects its market leadership and cash flow resilience. Investors will closely monitor the company’s progress in Ethiopia and its ability to manage regulatory risks in Kenya.

Informational only, not investment advice.