Is Safaricom worth more than all the companies in the stock market?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

25 November 2007

Ever since the government announced its intention to sell off a portion of Safaricom Ltd, there has been confusion about the company’s fair market value. Vodafone PLC had offered $100 million (equal to about Sh6.7 billion) for an additional 10 percent stake but the government refused saying that the offer was too low. At that price, Vodafone had valued the company at Sh67 billion (6.7 x 10 = 67).

Then in this year’s budget, the government announced that it expects to raise Sh35 billion from the sale of 25 percent of Safaricom through an Initial Public Offer at the Nairobi Stock Exchange (NSE). That puts the value of the company at Sh140 billion (35 x 4 = 140).

But recently, the Orange Democratic Movement jumped into the confusion: when criticising the sale of 51 percent of Telkom Kenya to a strategic investor, the party stated that, with 8 million subscribers, the fair value of Safaricom is about $8 billion or Sh520 billion.

So, is the fair market value of Safaricom Sh67 billion, or Sh140 billion, or Sh520 billion? Investors value a company based on its potential to make good returns in the future. This is assessed from profits and the value of net assets. Safaricom made Sh12 billion in 2006/07 and it had Sh33 billion in net assets at the close of the financial year.

To get a fair value, we compare it to an equally profitable company and also to one in a similar line of business. In the first category, East African Breweries Ltd. (EABL) is appropriate: It made a profit of Sh6.1 billion (after tax) in 2006/07 and its shares are valued at about Sh150 each at the stock market.

EABL has 659 million shares, therefore, its market value at the NSE is about Sh99 billion. This means that investors are willing to pay about 16 times the profit for ownership of this company. If we apply the same ratio to Safaricom, we get a market value of Sh192 billion (Sh12b profit times 16).

The net assets of the two are Sh19 billion for EABL and Sh33 billion for Safaricom. That is, EABL’s value is about 5.2 times its assets. Therefore, using the same factor, the market value of Safaricom should be Sh172 billion (5.2 x Sh33b).

Amongst those listed at the NSE, the company in the closest line of business is Access Kenya. It made Sh47 million in net profit in 2006 and had Sh130 million in net assets on 31st December 2006. Its current market value is about Sh3.6 billion. Applying the same factor to Safaricom yields a value of Sh924 billion - higher than the total value of all the companies at the NSE! Comparing the net assets of the two companies yields a Safaricom value of Sh913 billion.

The average value from the above calculations is Sh550 billion. Nonetheless, remember that the government had budgeted to get Sh5 billion from the sale of 51 percent of Telkom Kenya but it got almost Sh27 billion. If it can repeat that feat, then we can expect to get about Sh190 billion from the sale of 25 percent of Safaricom. That translates to a total value of Sh760 billion.