Safaricom PLC has grown its free cash flows at an average rate of 29.19% in the last decade.
Assuming Safaricom grows its free cash flows at a conservative rate of 13% for the next ten years, Safaricom free cash flow per share will amount to Kshs. 5.94 in 2030.
The current Safaricom free cash flow per share is Kshs 1.75.
Assuming Safaricom does trade at the usual multiple of 20 times free cash flows in 2030, then expected Safaricom price in 2030 will be Kshs 118.80.
This narrows down to an annual return of 14.58%.
The implication is Kshs 10,000.00 invested in Safaricom should grow to Kshs 39,002.00 in 2030.
And assuming your minimum required rate of return is 15%, then the maximum you should pay per share of Safaricom PLC is
Kshs. 29.70.And one may ask, what gives you the confidence that this projection may hold?
My answer is this:
(A) Safaricom PLC has reached a stage in this life that moving forward we are most likely to see a gradual decline in capital expenditure that will give a huge boost to its free cash flows moving forward.
(B) Anchor shareholder Vodacom and Vodafone PLC will be there to ensure good corporate governance is still adhered to in Safaricom PLC
(C) We are gradually moving to a cashless society and Safaricom Mpesa will take advantage of that. COVID 19 is just a catalyst to the inevitable cashless society in the future.
(D) Safaricom is yet to monetize the huge data at its disposal.
Comments and Responses:(E) If Ethiopia opens its borders to new entrants in telecoms like it's working on, Safaricom will use that as a new market, new opportunities, on a populace almost double Kenya's size.
There could be some good cheese there.
(F) Safaricom is always innovating, now working on some other financial products with new players. Think newspapers, and the metering solution with water companies.
Comments and Responses:Lots of assumptions and predictions about its future growth and earnings.
Its current value is far above its real value though.
It's P/E at Kshs 29.70 is 24.9 (using EPS average of 1.19 for the last 3 years).
P/B at the same is 8.3, using the latest book value/share of 3.57.
While it may yet realize your projections or even surpass them, it is already being traded at a price that would need it to grow its book value/share by 554% ( to attain book value/share of 19.8), in order to be reasonably priced (that is a P/B of 1.5 at most) and at the same time grow it's EPS to 1.98 in order for its P/E to be 15 at most at the price of 29.70.
That's a 66.3% increase. Again, maybe it will do that.
But anyone buying it at 29.70 would need to realize that they are speculating on its future, not buying it's present.
The current prices reflect optimism about the company/stock that most investors share.
In the end, the market will likely correct itself.
This is usually true particularly concerning stocks that have shown very great growth.
Comments and Responses:Only two assumptions made here:
1.Safaricom future growth in free cash flows
2. Safaricom future multiple of free cash flows.
Is that what you call too many assumptions?
Discount rate of 15% is absolutely your business, whether you use 15% or 20% or 50% it's up to you.
2. Safaricom average PE ratio for last three years is 1.59.
Safaricom current earnings per share is 1.84. So you may need to revise those projections on 66% growth in earnings per share to Kshs 1.98
3. Price to book value ratio is of little relevance to Safaricom given we have a lot of intangible assets in Safaricom like Mpesa, which is not found in Safaricom books plus Safaricom massive data on Kenyans etc.
Additionally, price to book value ratios should take into account the return on equity and return on invested capital and really a price to book value ratio of 1.5 assumes Safaricom return on equity and return on invested capital is around 13%, which is really unrealistic since both are over 45%.
Comments and Responses:How much return one wants from the share is their own business.
You actually made only 2 assumptions. So, a more correct term would be that the assumptions are big, not many.
The biggest of the two being a prediction on its price in 10 years’ time. The further into the future one predicts, the more unreliable the prediction.
To put this into perspective, from the time of its IPO to now, the price has increased by 509%, a phenomenal increase that has now outpaced earnings by 16.5x (using a price of 30.45, EPS of 1.84).
For it to reach 118.80 from a buy price of 29.70, it would need to grow by 300%, another phenomenal increase.
I think any prediction on the market's behavior at any time is extremely hard to realize.
On the free cash flows, it's a prediction based on the decisions of management that is sure to change significantly over a decade, as well as on the decisions that management makes in a very fast-changing business environment.
On the EPS, I used the average from 2017-2019. Not 2018-2020 because I'm more conservative about performances.
Source: Facebook.