Stock Brief - Airtel Africa (LON:AAF)

Airtel Africa’s vast operations provide telecoms and mobile money services to almost 118.2 million customers in 14 sub-Saharan countries. It is empowering the financially excluded and is modernising African digital infrastructure, playing an important role in enabling these nations to realise their potential in the decades ahead.

Its promising Mobile Money solution sees it play the role of bank to the previously ‘unbanked’. These mobile money services are vital in Africa, where communities can be isolated by large distances and underdeveloped infrastructure. Airtel has recently sold parts of this higher margin business in deals that value it at $2.6bn.

Over the past five years, Airtel has transformed itself into a profitable company with entrenched market positions exposed to strong structural growth trends. The company is among the leaders in all of its markets but competition is increasing and there is still plenty of work left to do. Mobile and digital penetration in Africa is still low. Populations are young, and growing fast. Millions of people are still unbanked or financially excluded.

The growth to be seen in Africa and its many thriving economies in the decades ahead will likely outstrip the UK, so is Airtel Africa a good way to gain exposure to these exciting markets?

Profile

What are the company's principal business activities, how does it generate its revenues?

Airtel Africa (LON:AAF) operates across 14 sub-Saharan African markets with substantial potential to grow its voice, data and mobile money services.

• Voice - pre- and postpaid wireless voice services, international roaming and fixed-line telephone services.
• Data - data communications services, including 2G, 3G and 4G in all 14 markets.
• Airtel Money - mobile money services, including payment services, microloans, savings and international money transfers.
• Other services- fixed-line telephony, home broadband, data centres.

Business model

The group has strong market positions, is often the market leader, and has the scale required to reinvest in its substantial operations, regularly notching up more than half a billion dollars in annual capex.

With spectrum assets in every country and multiple layers of data capacity, it is hard for new competitors to rival Airtel’s scale. Its estate includes:

• 25,368 network towers, data capacity of 12,000+ terabytes per day, and more than 54,500km of fibre across a modernised network offering 2G, 3G and 4G.
• A network of c2,800 regional and international partners offering financial and money transfer services.

• More than 200,000 activating outlets and a network of more than 1.8 million retail touchpoints.

Segments

Nigeria

Nigeria is Airtel Africa’s largest single country market. The country has a growing population of more than 200 million people, more than half of whom are under 30 years old, with digital entrepreneurship seen as an engine of economic transformation for the country.

Other market participants include MTN, Globacom, and 9 Mobile.

East Africa

Operates in countries with some of the fastest-growing populations in the world. Mobile, digital and financial services are essential to their future opportunities. The group says its Kenya and Tanzania 4G networks are now best-in-class, and it has leading 4G market positions in Malawi, Uganda and Zambia.

Other market participants include Safaricom and Telkom in Kenya, TNM in Malawi, MTN in Rwanda, Vodacom, Tigo, Halotel and TTCL in Tanzania, MTN, UTL and Africell in Uganda, and MTN and Zamte in Zambia.

Francophone Africa

Demand for voice, data and mobile money products continue to grow in this region, which is characterised by a young and growing population of 165 million people. The group is expanding its distribution network and around 60% of Airtel’s sites are now on 4G.

Other market participants include: Maroc and Sotel in Chad, Vodacom, Orange and Africell in the DRC, Moov (Maroc Telecom) in Gabon, Orange and Telma in Madagascar, Zamani, Moov (Maroc Telecom) and Niger Telecom in Niger, MTV in the Republic of Congo, and Cable & Wireless and Intelvision in the Seychelles.

Mobile Services

Demand in sub-Saharan Africa remains strong as growing populations of aspirational, price-conscious consumers look for ways to connect. Airtel Africa continued to add new customers for both voice and data services in FY21, growing its overall customer base by 6.9%, to 118.2 million subscribers.

Demand for voice services continues to grow as mobile penetration increases. The mobile voice business line contributed 53.6% to consolidated group revenue in 2020/21.

Regarding data, Airtel’s focus is on simple, transparent, and affordable data products. Airtel is investing in its 4G network and reinforcing its position as leaders in 4G in most markets.

Airtel Money

This is perhaps the most interesting aspect of Airtel Africa. Digital financial services are transforming sub-Saharan Africa, where millions of people lack access to traditional banking services but are unlocking the potential of digital commerce through mobile phones.

Airtel Money is part of this transformation, which is driving financial inclusion at scale and offers new ways of storing, sending, and spending money. Services include mobile banking, merchant payments, loans, savings, international money transfers, insurance, and virtual cards. This is a large addressable market.

The group has developed partnerships with Ecobank, Standard Chartered Bank, Mastercard, Western Union, MoneyGram, WorldRemit, and Mukuru, and remittance aggregators like Homesend, MFS Africa, Terrapay and Thunes.

Two recent announcements in March and April 2021 demonstrate how Airtel is unlocking value by bringing strategic investors into its mobile money business.

The Rise Fund, the global impact investing platform of leading alternative investment firm TPG, is investing $200m in Airtel Mobile. Mastercard will also invest $100m. Airtel is in discussions with other potential investors in relation to possible further minority investments into Airtel Money (up to a total of 25% of the issued share capital of AMC BV).

Both transactions valued the mobile money business at $2.65bn on a cash and debt-free basis and Airtel Africa continues to hold the remaining majority stake. The proceeds will be used to reduce group debt, and invest in network and sales infrastructure.

The difference in characteristics between Mobile Services and Airtel Money is striking, with the former being much higher margin and requiring far less capex.

Business strategy

We continue to see delivering the best 4G network in our markets as a key focus, and our goal is to be the market leader everywhere we operate.

Airtel Africa’s strategy revolves around delivering a leading, modernised network that can provide the data capacity to meet rapidly growing demand across its markets. In doing so, Airtel aims to ‘reduce the digital divide and enhance financial inclusion in the countries we serve'.

That means improving basic network uptime and quality as well as expanding its network footprint and 3G and 4G capabilities. It will do this by focusing on:

• Rural coverage expansion through new site rollouts,
• Network resilience and service continuity,
• Modernising its network, and
• Expanding 4G coverage and building capacity,

History & Growth

Airtel is growing ahead of the telecoms industry in Africa.

If anything, Covid-19 has accelerated the trends that underpin its strategy: a continuous and expanding demand for mobile money and mobile services from growing populations who are underserved by infrastructure, especially those in remote rural areas.

Given the group’s markets, it is unsurprising to see a positive revenue trajectory.

Recent News

Most recent trading update

Q1 2022

Our Q1'22 results have been very strong, with reported growth of 30.7% in revenue and 42.4% in underlying EBITDA, with constant currency growth of 33.1% and 46.2% respectively. Q1 of last year was impacted by the start of Covid, but even after adjusting for these effects, our Q1'22 revenue growth rates for the Group, service segments and reporting regions were all ahead of Q4'21 trends.

Catalysts

Trends & Events

Airtel’s markets have some of the highest projected population growth rates in the world, and the region currently has low penetration levels of unique mobile customers (just 46% of the population owning one or more SIM), low minutes of usage, low data consumption, and limited traditional banking services.

The above coupled with an expanding urban middle class, limited infrastructure, and people’s desire to connect makes for some powerful structural dynamics that drive growing demand for data, mobile voice, and mobile money services across sub-Saharan Africa.

These economies are increasingly reliant on mobile networks for voice and data services. In Airtel’s markets, unique mobile users are forecast to increase by 5.4% each year between 2020 and 2025 to some 346 million unique users.

The group’s region is also experiencing rapid expansion in data usage despite relatively low smartphone penetration (around 44% of subscribers have a smartphone). The availability of 4G is a key factor in the growth of data and is an area of keen focus for Airtel.

Limited banking infrastructure means that customers do not have easy access to traditional financial institutions. Less than half of the population has a bank account, the lowest proportion of any emerging market region.

There is a clear need for mobile money services. Active mobile money accounts in sub-Saharan Africa grew by some 18% in 2020 to 159 million.

Risks

What risks does the business face?

Competition and market disruption

There is increasing competition with respect to pricing and market share. Airtel commits substantial capital to keep pace with changes in technology.

COVID

The pandemic has underlined how critical telecoms are to Airtel’s markets.

Cyber and information security threats

Airtel is increasingly exposed to the risk of cyber-crime.

Cost pressures

Operating costs are subject to fluctuations in global commodity prices, market uncertainty, energy costs, and the cost of obtaining and maintaining licences, plus spectrum and other regulatory requirements.

Currency risk

Airtel operates in many markets and is exposed to currency risk.

Regulatory and legislative risk

The telecoms and banking sectors are highly regulated and Airtel must work within the frameworks created by governments and regulatory authorities.

Majority shareholder

Bharti Airtel owns around 68% of Airtel Africa and there is a small free float. This unusual share register structure may put some off, as the majority shareholder holds a lot of power.

Summary

Bull points

Structural growth trends; strong market positions; infrastructure and financial scale; network of trusted partners; Mobile Money offers growth potential.

Bear points

High levels of net debt (but coming down); currency risks; Covid still an issue; high levels of capex; small free float.

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If you’d like to read more, Roland has recently covered Airtel Africa here and Retireyoung’s post from 2020 continues to attract comments.