Is FTSE 100 Multibagger Airtel Africa Still Too Cheap?

16th Aug '22 by Roland Head

15 comments 4124 reads

African telecoms operator Airtel Africa (LON:AAF) joined the FTSE 100 at the end of January, but as far as I can see, it hasn’t yet gained much of a following among UK investors.

Despite this, this emerging markets business has proved to be a much more profitable investment over the last couple of years than its more popular FTSE peers, Vodafone and BT Group.

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In June 2021, I added Airtel Africa to my rules-based SIF model portfolio here at Stockopedia, and to my personal holdings. The stock has since become SIF’s top performer and (nearly) a two-bagger for me.

I’m keen to preserve these gains if possible, so this week I’m going to take a fresh look. Can this stock continue to perform well after such a strong run?

Airtel’s QVM factor scores certainly continue to look favourable:

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At a macro level, I’m also bullish on the medium-term growth outlook for the African telecoms and mobile money sectors. However, even if I’m right, that doesn’t necessarily mean that Airtel will be able to maintain its straight-line profit growth without any blips.

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Are there any clouds on the horizon? Let’s take a look.

Money+data = unstoppable growth?

Airtel Africa is the second-largest telecoms operator in Africa. The group has 132m customers spread across 14 countries. Airtel’s customer base includes 47m data users and 28m mobile money users.

For comparison, Vodafone has 185m African mobile users and 90m data users.

Airtel’s management expects the group’s addressable market to expand from 267m unique users in 2020 to 346m by 2025. This growth is being driven by urbanisation and population growth, but also increasing adoption rates.

According to Airtel’s website, just 46% of the population in operating markets own a SIM card. A 30%-50% increase in users seems quite plausible to me – something that would be impossible in the saturated markets of Europe.

The group’s latest results showed a 9% increase in customer numbers during the year to 31 March. Within this, the number of data users rose by 15%, while the number of mobile money users rose by 21%.

I expect to see growth in data and money service usage continuing to outpace overall user growth. These products provide affordable access to information and…

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TheWatchmaker

16th Aug '22

Thank you Roland - great write up as always.

I've been invested in Airtel Africa (LON:AAF) since Dec-2020. I took some profits by selling 1/3 holdings near the recent peak just to rebalance.

(In my head the recent peak was due to anticipation of very good results and the subsequent dip a correction on publication of "as expected" results - but who knows?)

I agree, ownership structure is a concern.

Still looks a favourable outlook to me. Time will tell.

aflash

The story is great, the price action is not.

Volume is constant.

Does this mean supply equals demand?

Maybe institutional buyers know that the owners will supply stock if the price moves up. This seems to have been the case in July. There was a lot of buying on the 7th and 25th, a lot of selling from 28th on. Disappointed traders are now following suit.

I have reduced my holding.

ridavies

As usual Roland, a stunningly brilliant yet straightforward analysis. The elephant in the room for me - and there are fewer in Africa than ever before, but still enough? - is the fact that the world is headed for recession and emerging/third world countries seem to suffer the most under these conditions? Is that is a factor of sufficient importance to hit Airtel Africa (LON:AAF) either in terms of future results or, even more important, investor sentiment and its effect on the SP via selling, lower acceptable PE etc? Your thoughts please.

Chris1011

Thanks Roland for another excellent article.

You mentioned the SIF portfolio in your write-up - are you planning to publish a July review on any buy/sell decisions over the coming days?

Douglas1971

Thanks Roland. Been on my watch list, passed the criteria to buy and recent dip failed the criteria to keep and back to the watch list! I take on board peoples concerns and agree. I will be keeping a close eye on how the share develops.

BANNA162

I agree and have done well. My stop loss is further away now to protect against volatility

BnB

Revenues are denominated in USD, so is share price consolidation of the last 6 months perhaps just a product of the strengthening dollar masking progress?

abtan

Airtel Africa (LON:AAF) (no position)

Hi Roland

Thanks for the article.

A quick point on the use of EBIT. I think it's dangerous to use this metric as financing costs are still very high.

For example, EBIT in Q1 2022 was $425m, but this excludes financing costs of $151m.
And then there was a tax charge of $119m after this too.
That's a lot of the Operating Profit eaten up.

I also remain perplexed by the statement that HoldCo debt has been reduced, but also that debt has been passed to the OpCo level, where the interest rate is higher (5.1% --> 5.6%).

Does this mean that overall debt is actually exactly the same...and yet they're paying more interest? Why would they do that?

It's hard to tell as I know the company keeps selling off assets, so surely debt must be decreasing? But when I look at the balance sheet, net debt has gone up since Year End (see below). It's a little confusing.

Having said all the above, I must admit there are times when I read nothing but positive comments and think that I must be missing something. There's a good growth story so perhaps I should be focussing on that instead?

Roland Head

17th Aug '22

Hi Chris1011,

We've had a slight rejig of the publishing schedule re. SIF. I am now producing quarterly updates on activity/progress in SIF.

The most recent update covering H1 2022 was here:

https://www.stockopedia.com/co...

My next update will be at the start of October.

Regards,

Roland

Hi abtan,

Assuming the Airtel Africa (LON:AAF) OpCo's are consolidated (i.e. majority ownership/control), then I think the OpCo debt will be included in group (consolidated) net debt.

So Q1 net debt of $3bn is down from $3.5bn at the same point last year.

As you say, given recent assets sales, some reduction would be expected.

My impression is that shifting HoldCo debt to OpCo level is designed to reduce currency risks. OpCo debt is normally denominated in the local currency, whereas HoldCo debt is typically $/£/€.

At face value this seems logical to me, even at the expensive of a slightly higher rate (effectively a currency hedging cost). However, I think you're right to point out the potential for financial engineering - without looking directly at the OpCo accounts, it's hard to be totally certain what's happening.

Peter171

18th Aug '22

Hi Roland, it is always pleasing to have a “pundit” (excuse expression) agreeing with my sentiments. I don’t have many long term hold investments in my portfolio, but this is one. As they say buy on the dips! A great synopsis.

Steel Monkey

Hi Roland,

Thank you for an insightful article on Airtel Africa (LON:AAF)

I too personally think it is a stock with upside potential. I agree with @abtan on the use of EBIT for infrastructure companies where the capital structure is typically debt and equity. Having said that, Airtel Africa (LON:AAF) demonstrates good fiscal discipline. They've repaid $5 billion debt since 2017. Revenue and net income have consistently increased YoY along with their per share metrics. All these indicate a sound management executing against robust operational and financial plans.

Its definitely worth considering for my portfolio. Might open a position this week.

Satishan

A point of concern is the $3.8 billion goodwill on the balance sheet, its 40% of Total Assets. Impairing this will result in reduction in net income and earnings. Quoting their annual report - "The carrying amount of goodwill as of 31 December 2021 was $1,277m,
$1,861m and $719m for Nigeria, East Africa and Francophone Africa, respectively. The recoverable amounts of the above group of CGUs are based on value-in-use, which are determined based on ten-year business plans that have been approved by the Board." I assume these are acquisitions purchased above book value with a ten-year payback period.

Notwithstanding the goodwill, its definitely worth considering.

Boon

27th Nov '22

Not just overall currency risks, but it also reduces default risks as a shareholder of the HoldCo. If things go south in a OpCo, they can just write it off and cancel the debt in the OpCo. However, any debt on the HoldCo still stays with the HoldCo...

But yes - I agree with Roland that the main benefit is to match debt currency to revenue currency, to derisk FX fluctuations, which can be extreme in Africa.

Recession is a concern - but I would categorise mobile services under essential, like electricity and water. Combined with the secular growth in mobile penetration in Africa, this should still produce revenue growth for the next 5 years, even if there is a recession.

Is FTSE 100 multibagger Airtel Africa still too cheap?

Money+data = unstoppable growth?

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Roland Head

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