At Sh5, Safaricom is more expensive than KQ at Sh53

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

30 March 2008

After the debate regarding the ownership of Safaricom Limited, politicians have now expressed doubts about the pricing of the shares in the Initial Public Offer (IPO). One of them complained that Sh5 is too low compared to the Sh11.25 price of Kenya Airways when the shares were floated on 25th March 1996 – almost exactly 12 years ago. Is this assertion correct? To find out, we need to understand how to asses the price of a share.

There are two ways of doing this; first, in terms to the earning history of the company and, secondly, in comparison to the value of net assets. At the time of the Kenya Airways IPO in April 1996, the company’s audited financial report as at 31st March 1995 showed a net profit after tax of Sh1.54 billion and net assets valued at Sh7.47 billion. It had a total of 462 million shares issued, out of which, 235 million were being offered to the public at Sh11.25 each.

From these figures, the net profit per share (also known as, Earning per Share – EPS) worked down to Sh3.33. This is obtained by dividing Sh1,540 million by 462 million shares. The net assets value (NAV) of each share was Sh16.18 (Sh7.47 billion divided by 462 million shares).

Comparing these “per share” values to the offer price of Sh11.25, we find that the price-to-earning (PE) ratio was 3.38 (Sh11.25 divided by Sh3.33) and the offer price was 30 percent less than the book value of the shares (Sh11.25 compared to Sh16.18).

Now let us look at the corresponding figures for Safaricom. The most recent full-year audited accounts (31st March 2007) show a net profit of Sh12.01 billion and net assets of Sh32.8 billion.

The IPO is offering 10 billion shares representing 25 percent of Safaricom. Therefore, the whole company is divided into 40 billion shares. Thus the earning per share is 30 cents (Sh12.01 billion divided by 40 billion shares) and the net asset value per share is 80 cents (Sh32.8 billion divided by 40 billion shares).

At the price of Sh5, the price to earning ratio is 16.7 (Sh5 divided by Sh0.30). This is almost five times the 3.38 PE of the Kenya Airways IPO. Thus, in terms of profitability, Safaricom is priced higher than KQ. Secondly, the offer price is 6.25 times the net asset value (Sh5 divided by Sh0.80). That is, the shares are being sold at a 625 percent premium – compare that to the 30 percent discount in the case of KQ.

Therefore, in all assessments, Safaricom is more expensive than Kenya Airways was – even though Sh5 is less than Sh11.25. Indeed, even at the current market price of Sh53, KQ is still a cheaper buy!