SAFRICOM: A MUST HAVE

First, my apologies for going under for quite a while. But with the murderous orgy we experienced after the elections one may be forgiven for losing interest in certain things. I guess with the impending mother of all IPO's my remergence can never be more timely.

Safaricom IPO is finally here. As we wait for the Safaricom prospectus expected in the next two weeks just before the offer begins (28th March),let me indulge on some preliminary analysis based on available facts

• The government is offloading 25% of Safaricom[or is it it's 60% share holding? This should get clearer from the prospectus] worth Ksh 50 B.This means Safaricom(100% )is worth KSH200B
• The total number of shares on offer are 10B at Ksh 5 per share (This means that the total number of issued shares are 40B of which 10B will be listed (25%))
• The allocation will be classified into two categories: Domestic investors (East Africans) and International institutional investors.
• The price for East Africans is fixed at Ksh 5 but for the international institutional investors, it will be determined via a book building process(That means foreigners may have to buy it at a higher price than Ksh 5 per share which would be a good signal of the anticipated opening price on June 9 when the shares begin trading in the NSE)
• 65% of the offered shares are reserved for East African residents-Kenya, Uganda, Tanzania, Rwanda and Burundi. This means the 'East Africans' will need to raise KSH 32.5B.
• In case the domestic investors(East Africans) oversubscribe their category by more than 200%,there is a provision that 15% of the shares reserved for the international pool will be clawed back to the domestic pool
• This means that if the domestic pool raises Ksh 65B ( 200% of domestic category),then the shares to be allocated to this category will be 80% of the total offer(ie 8B shares Worth Ksh 40B).
• This method will ensure that one can expect to be allocated at least 60% of applied for shares in the event of a 200% oversubscription in the domestic category(40/65 x 100%=61.5%)
• Safaricom in Year ended 2006 made a Net profit of KSH 12B.This means an Earnings per share (EPS) of: KSH 12B/40B = KSH 0.30
  The share is therefore being offered at P/E of :KSH5/KSH 0.3=16.66
• The rumored Gross profit for year ended 2007 is KSH 21B(Net Profit KSH 14.7B)This means the shares are actually being offered at an EPS of KSH 0.3675 and P/E of 13.6.

The financial year for Safaricom ends in March. The begging question is whether the dividends for year ending March 2008 will be accruing to the government or to the new shareholders. I strongly believe the latter will be the case. I suspect the year end results will be announced sometime in May before the shares hit the market in June. It will be interesting to see in the prospectus the dividend policy Safaricom aims to put in place.
The share is not only well priced based on the unit price Ksh 5,but also well priced based on its P/E. The limiting of the foreign allocation to 35% (or 20% in case of a >200% oversubscription in the domestic category) ensures that Post IPO, the share will receive sustained demand from foreigners as they will want to up their shareholding.
Though this IPO is like no other in terms of size it would be instructive to compare it with other recent IPO’s in order to logically predict the direction this stock might take after listing

Company Listing price Listing PE ratio Current price Current PE
Kengen 11.90 10.70 26.00 23.00
Scan group 10.45 10.45 28.25 23.35
Access 10.00 16.40 25.75 35.00
Eveready 9.50 15.80 7.50 12.5
KenyaRe 9.5 14.62 14.15 22.50

You must note that the above datum has been derived with the market at it’s lowest due to the anticipated Safaricom IPO and after a stint of under performance due to post election violence.

My take; sprint for this stock. For Short termers be cautioned that the 10 Billion shares being offered might be enough to quench the hunger for Safaricom chunk of ownership either by the QII’s or the certificate framing investors to not have a post IPO price rally but for long term the growth potential of Safaricom is unparalleled with the communication sector still being the leading growth area in developing economies.
Disclaimer: some facts and wordings sourced from the net