Safaricom

Where we land

Safaricom earns a 48% return on the money its shareholders have put into the business, a level of profitability very few companies anywhere sustain. Its mobile-money service, M-PESA, now accounts for 43% of revenue and has become the part of the company that carries profit growth rather than merely adding to it. We award the company gold and find it appealing.

The reason is the gap between the business and the price. At 15 times earnings, the shares are priced as though profits will shrink over the next five years. The company's recent record and analysts' forecasts both point the other way.

What the business is

The company does two main things. The larger, at 54% of revenue, is a mobile phone network selling calls, texts and data in Kenya and, more recently, Ethiopia. The second, at 43%, is payment processing, where M-PESA sits: a service that lets people send money, pay shops, save and borrow through their phones. The remaining 3% comes from hosting data and computing services for businesses.

This is an unusually profitable mix. Of each sale, 58% is left after the direct cost of providing the service, and after the wider cost of running the company, operating profit still comes to 34% of sales.

The steadiness matters as much as the level. Over five years the gross margin has had a middle value of 55% and has typically stayed within 3 points either side of that. A margin that barely moves through good years and bad points to customers who keep paying and costs that stay under control, and it is the foundation for most of what follows.

Why now

The business is being pulled forward by M-PESA. More payments, merchant transactions, savings and small loans are running through the service in Kenya.

The market has started to notice. Over the past three months the shares have gone from middling to near the top of the market for how strongly they have been performing. That alone proves little, but it fits a picture in which investors are beginning to price in the improvement analysts forecast.

That momentum, on top of a business of rare quality, brought Safaricom into our Gold Income 10 portfolio this month, as a gold-rated company that also ranks among the best we cover for the income it pays shareholders.

The case for

The strongest argument is the quality of the business itself. Safaricom ranks close to the top of the whole market on quality and ahead of every listed African telecom peer. It was profitable in every one of its last ten half-yearly results. Its return on shareholders' equity stands at 47.5%, and over five years its median return on all the money invested in the business, borrowed as well as owned, has been 30.9%. Returns like these mean each new unit of investment generates a great deal of profit, which is what allows a company to grow and pay dividends at the same time.

The second argument is that earnings are expected to accelerate. Analysts collectively forecast earnings per share rising from 2.90 to 3.36 next year, an increase of about 16%. Their revisions support that: over the last 45 days, two analysts raised their estimates while only one cut. Forecasts drifting upward usually mean the business is coming in at or ahead of what was hoped.

That argument carries a caveat. Sales grew 9.5% over the past year, slower than the 11.2% annual pace of the last three years. An earnings forecast of 16% on sales growth of around 10% depends on margins holding up or widening, which is why the mix of the business matters so much.

Where the growth could come from

With no recent news to explain the shares, the clearest account rests on M-PESA, and it most likely explains why analysts expect earnings to grow well ahead of sales. Payments and lending carry higher margins than voice calls, so when M-PESA outgrows the rest of the company, profits rise faster than revenue. What would confirm it is M-PESA revenue and active users growing faster than group revenue in the next results, alongside rising merchant payments and lending volumes.

The phone network remains the largest business, and it pays for the infrastructure M-PESA runs on. Here the force is more Kenyans using smartphones and buying mobile data and home fibre, while voice calls and texting fade. The company does not break out data from voice, or Kenya from Ethiopia, so the health of this engine shows up indirectly, in data revenue and usage per customer rising fast enough to offset the decline in older services. If it does, the core holds steady; if not, it drags on group growth.

Ethiopia is the largest unknown. The company is building a new mobile network and M-PESA service in a large, lightly served market, and so far that effort has been loss-making and has absorbed a great deal of capital. It is small relative to Kenya and sits inside the telecom figures. Losses narrowing toward breakeven would remove a drag on group earnings, and real success would give the company a second large growth market. Narrowing losses, a rising subscriber count and growing M-PESA usage there would be the signs.

Against these engines sits a headwind. Brent crude has risen 65% over the past year to $114 a barrel, which raises Kenya's import bill. For Safaricom that means dearer diesel to power network sites, and the possibility that squeezed household budgets slow spending on data and money transfers. Margins holding steady would show the business absorbing it.

The business cloud and connectivity arm is too small to move earnings today. Hosting, cloud and fibre links for Kenyan companies and government are an option rather than an engine; if that line grows faster than the group, it would gradually spread the company's reliance beyond consumers.

The case against

The most serious objection is that the shares are not cheap on every measure. The stock trades at 7.2 times its book value, the accounting value of its assets. On that basis it sits only in the middle of the market for value, and its standing there has slipped over the past three months as the shares have risen. Its quality standing has also edged down over the same period. None of this undermines the business, but it changes the starting point: after a strong run, a stall in the expected earnings rise would meet investors who have already paid for some of it.

The comparison with peers cuts both ways. Safaricom's 58% gross margin is the richest among its African telecom peers, ahead of MTN, Airtel Africa and Vodacom. Yet the market values it at a lower multiple of earnings than MTN, at 18 times, and Airtel Africa, at 21 times, and close to Vodacom's 14 times despite Vodacom's much thinner margin. One reading is that the market is underrating Safaricom; the other is that investors are deliberately charging a discount, whether for Ethiopia, the currency or the economy it operates in, and that the discount may be deserved.

Debt is the other thing to keep in view. Net debt amounts to 0.7 times equity, moderate but not trivial.

What the price assumes

Suppose the shares stay where they are for five years and then trade at 18.4 times earnings, the middle value for every profitable listed company we cover. For that to hold, earnings per share would need to reach only 1.96 in five years.

That is below what the company earns now: earnings compounding at minus 4% a year, a steady shrinking of profit. Because Safaricom's earnings are positive and growing, comparing that implied rate with its actual growth is the natural test.

The record looks nothing like shrinkage. Operating profit has grown at 33% a year over the last three years. If that trend continued, earnings per share would reach 9.82 in five years, 502% of what the price requires.

Nobody should expect a 33% pace to run unbroken for five years. The point is the size of the cushion. Even a sharp slowdown would leave earnings well above the level the price assumes, and next year's forecast 16% growth already sits far on the right side of that line.

The other side of the medal

The risk we would keep in view above the others is Ethiopia. It is a large new market still losing money, and it could drag on group profit for years rather than months, just as expensive oil presses on the Kenyan business that pays for it.

It is decisive because it touches everything else. The case rests on margins holding up while earnings grow faster than sales. Ethiopian losses work directly against that, and they face the same pressures as Kenya: diesel for network sites, equipment priced in dollars, and a local currency that can weaken. A prolonged build-out could absorb the gains M-PESA delivers in Kenya and leave group earnings growing far more slowly than forecast.

The signs would be Ethiopian losses that fail to narrow from one half-year to the next, stalling subscriber growth or a sharp fall in the birr, especially alongside group margins slipping under the weight of fuel costs.

What to watch

The next results will answer the central question. Group sales are running 10% above a year ago; the thing to look for is M-PESA revenue growing faster than that, alongside Ethiopian losses getting smaller. Both together would support the forecast of 16% earnings growth and the shift of the business toward its most profitable parts.

The signals that the reading is wrong are just as clear. Sales growth slipping well below the current 9.5%, or the gross margin breaking out of its narrow band around 55%, would suggest the steadiness at the core of this case is weakening. If, at the same time, analysts cutting estimates began to outnumber those raising them, the combination of quality and growth that earns Safaricom its gold would no longer hold.

The numbers

The same industry, for comparison

Research for information, not personal investment advice or a recommendation to buy, sell or hold any security: see Important information. Data as at 30 September 2026.