A few months ago I wrote down my analysis of Safaricom Limited. Safaricom: Past, Present & Future evaluated the business operations of Kenya’s biggest telco, it’s past financial performance and my thoughts on its future prospects. I started with an analysis of its history from the price-war days with Kencell and YU Mobile, and the initial public offering of its shares in 2008. I considered the present, where Safaricom and M-PESA are leading brands in Kenya, the company enjoys 65% market share in terms of subscriber numbers, and sustains nearly 200,000 direct and indirect jobs. As of the latest full-year earnings report (link), total assets exceed borrowings nearly 10 times, and if revenues were to reduce by 10% and the total expenses increased by 10%, revenues would still exceed expenses by more than 20%. Even in the absence of significant leverage, the company’s return on equity is at a stratospheric high of 45%, continuing a trend it has been on for the last 6 years. I also wrote down what I forsee in Safaricom’s future, in particular, that the company will (continue to) benefit from Kenya’s demographics and that its ISP business (fixed and mobile data service) will be the most important area for growth:
(i) Most of Kenya’s population is under the age of 40. It is quite likely that a large number of Safaricom’s customers are, by extension, under the age of 40. I do not think that the over-40’s are likely to spend say 10% more on calls and SMS over the next few years, while I do think that the under-40’s are likely to spend at least 10% more on mobile data services going forward. This youthful (“millennial”) subscriber base is tech-savvy and plugged in, requiring bytes of data for every retweet and Instagram like.
(ii) With smartphones becoming cheaper by the day, more and more people have access and are buying these devices. Cheaper and more interactive, I think messaging applications such as WhatsApp and Telegram are likely to steal away growth from SMS and voice minutes, increasing the revenue spent on mobile data. H1 2017 financial results seem to support this, with revenue from outgoing voice calls up 1.9% YOY, messaging revenue up 8.1% YOY and revenue from mobile data up 46.3% in the same period.
But it’s not all rosy; there are several areas of concern.
- The runaway growth that the company has enjoyed is likely to slow down (“With 65% of mobile phone subscribers already on the network, and the firm enjoying 77%, 93% and 63% market share in the voice calls, SMS and mobile data segments, there really isn’t much growth to be expected from acquiring much more market share”);
- Competition is likely to increase (“An increasing number of players in the data and mobile money sub-sectors could result in increasing price pressure, that may have a gravitational pull on revenues. In addition, the company may have to invest in its infrastructure (4G, fibre, cyber security) to sustain its competitive advantages”);
- And, maybe most importantly, the company will have to be wary of complacency (“…we know all too well of companies that dominated entire industries a decade ago and today are merely fractions of what they once were, if they exist at all (remember Nokia?)” and now Nakumatt?).
At the end of the article I proclaimed: “I would not be surprised if Safaricom became Kenya’s first trillion-shilling company by market capitalisation in the not-too-distant future” (Safaricom shares are trading at over KES 25, valuing the entire business at more than KES 1 trillion [link]) with the caveat that I was evaluating Safaricom merely as an operating business and not as a potential investment. Following the article, the question I have received most is precisely that: having analysed the company, do I think Safaricom is a good investment?
The most important part of this question is the adjective good. What is a good investment? The truth is, it depends. Good to me, may be poor for you, and great for another person. To evaluate goodness, one must, at the very least, have thought through their investment philosophy. Why are you investing? What are you looking for? What level of risk are you comfortable with? What’s your time horizon? Do you need to receive a dividend every year? Are you an active investor or a passive one? With a well-defined investment philosophy, you will be able to assess goodness for you.
To help you do think through an investment philosophy and refine your decision-making, I have put together 4 resources I consider useful:
1. Please read “The Superinvestors of Graham-and-Doddsville“, written by Warren Buffett in 1984. He runs Berkshire Hathaway (ranked 8th in Fortune magazine’s list of the 500 biggest companies in the world by revenue – US$ 223 billion in 2016), and with a personal net worth of US$ 80 billion, he is the second richest man in the world. The article eloquently makes the case for long-term value investing, and his own performance as an investor clearly proves that the approach works.
2. If the 👆 article struck a chord with you, go ahead and get yourself a copy of “The Intelligent Investor” by Benjamin Graham. First written in 1949, the book is a treatise on investing, and is –I think– required reading for anyone who wants to be a successful investor. Warren Buffett highlights chapters 8 and 20 of the book as essential, so you may want to pay special attention to those. You can get a free PDF copy of the book by clicking on the image below.
3. Read this article on the brilliant Farnam Street blog about how to make intelligent decisions.
4. Finally, I have prepared a tool that will help you make your investing decisions. It’s an excel spreadsheet that will help you run a simple cash-flow valuation on a company, assess the balance sheet and help you decide whether or not you should BUY. Being a spreadsheet, you are free to enter your own data and to tweak it as you like. You can change the time horizon, the risk-free rate, your margin of safety, and other parameters that go into doing such an assessment. I hope it, and the 3 reading recommendations, help you refine your thinking and make better decisions about your investments.