Is FTSE 100 multibagger Airtel Africa still too cheap?

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.

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:

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.

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 banking services that were previously unavailable to millions of people.

For us here in the west, it may be hard to imagine how transformative this can be for individuals and small businesses.

What could go wrong?

Despite the potential attractions of the African telecoms market, I can see some reasons why investors might be cautious about this stock.

Airtel Africa was only floated in 2019, so it doesn’t have much of a track record yet as a public company. Many IPOs disappoint in their first couple of years, so some caution may be warranted, especially given the increased legal and political risks that apply to some African markets.

The group’s ownership structure might also be a concern for some investors. Airtel Africa has a premium listing and is a member of the FTSE 100. But the shareholder register suggests that the business is still effectively controlled by Indian billionaire and chairman Sunil Bharti Mittal.

Stockopedia shows Airtel Africa with a free float of just 22%, suggesting that outside investors are never likely to have much influence on events.

It’s not always easy to know how much weighting to put on risks such as these. But they’re not deal breakers for me, so let’s move on and take a look at Airtel Africa’s financial scores.

Value: cheap where it counts

A ValueRank of 71 seems promising. Airtel Africa’s trailing-12-month (TTM) value ratios certainly seem to suggest that the stock could be attractively priced.

• P/E: 10.3
• Dividend yield: 2.9%
• Earnings yield (EBIT/EV): 17.6%
• Price/free cash flow: 6.0x
• Price/book: 1.9x
• Price/sales: 1.4x

I’ve highlighted Airtel’s earnings yield because if this level of profit is sustainable, I’d see this as a clear indicator of value.

Another positive factor is that net debt has been falling since the 2019 IPO. The IPO itself appears to have been used to raise money to reduce debt levels:

Overall, my impression is that Airtel Africa looks reasonably valued, even if earnings growth does slow.

Quality: impressive

Big telecoms companies are often quite cash generative, but what makes Airtel Africa jump out to me is the group’s profitability.

This business seems to be able to generate a lot more profit from its fixed asset base than Vodafone or BT:

At the current run rate, it looks like Airtel Africa could generate enough EBIT profit to replenish its fixed assets in 2.5 years. This compares to 10 years for BT and 13 years for Vodafone.

This profitability is reflected in Airtel’s high ROCE:

Why is Airtel so much more profitable than Vodafone or BT? One obvious difference between Airtel and the other two companies is that Airtel is a mobile-only operator. Vodafone and BT both have large and costly fixed-line (broadband) networks.

Beyond this, I wonder if there are other cost advantages to building and operating networks in Africa.

I’d need to do more research to understand this. But if Airtel can deliver earnings growth and profit margins in line with expectations, I think there’s a strong case to suggest this FTSE 100 stock looks cheap.

Momentum: slowing?

Airtel Africa’s MomentumRank of 60 has a red arrow next to it as I write. This indicates a recent fall in momentum. By hovering over the arrow we can see the 30-day change.

This drop seems to have followed the publication of the company’s Q1 results on 28 July, which triggered a minor sell off:

Is Airtel Africa’s momentum starting to fade? The quarterly results didn’t highlight anything untoward, in my view, but they did flag up inflationary cost pressures and one or two other transitory headwinds.

The market seems to have taken this as a sign to pause for breath, but I don’t think there’s any evidence of a serious slowdown at this time.

Price momentum: Trading volumes have eased and the stock has slipped below its 50-day moving average. But relative strength is still strong on a one-year view:

Broker estimates have remained fairly stable, too. Although the consensus rating has fallen slightly, earnings estimates are largely unchanged:

Current forecasts suggest that earnings growth will remain at about 15% per annum over the next 18 months. This gives some fairly attractive rolling forecast numbers:

Conclusions: keep the faith?

My impression of Airtel Africa remains favourable. Although earnings growth could slow somewhat over the next 12 months, I think the shares still look very reasonably priced.

The main risk factors I can see – rightly or wrongly – are the group’s ownership structure and African operating base. However, I believe the medium-term growth opportunity for this business is genuine and substantial.

On balance, I’m happy to keep holding the shares.

Disclosure: At the time of publication, Roland owned shares in Airtel Africa.