Description

One of my most interesting ideas is an African telecom and mobile money company that is listed in London, with significant currency risk and a controlling shareholder based in India, what could go wrong? Despite double-digit growth as well as a competitively advantage mobile money business that management is considering IPOing at a valuation close to the company’s total market capitalisation, this is being priced far lower than Western telco peers on overblown currency and geopolitical fears. In reality, EBITDA and revenue growth after currency effects has been double-digit for many years and the essentiality of communications infrastructure in a country and the political and social unrest that would result from disruption to voice, data and connectivity networks makes governments disrupting Airtel Africa’s business in a meaningful way a near-zero probability event not to mention the knock-on effect of FDI outflows that would ensue. Additionally, Airtel Africa’s core geographies are capitalist (albeit not the most business-friendly) nations that have been regulating telcos with minimal scope for pricing increases but this hasn’t slowed down the business’ topline and bottom-line growth. On a risk-reward basis, shares are very attractive at this level and stand to benefit from simple capital allocation, organic growth and multiple re-rating although upside is still substantial if the stock only benefits from organic growth and significant cash flow. 

Mobile services: 

Standing at 87% of revenue and 85% of EBITDA, Airtel is still predominantly a telecoms company with operations in 14 different African countries which stemmed from their 2010 acqusition of the Zain Group’s telecom assets which were located in 12 of Airtel’s 14 current countries in their footprint. This segment’s growth has been rapid with constant currency revenues increasing by 75% from 2017 to 2023 with this growth brought about by the mix of increasing penetration of smartphones and connectivity in their key geographies as well as expansion of their telecommunications capacity with network build-outs and upgrades with 87% of capex in FY23 directed toward growth initiatives and approximately 90% YTD in 2024. Although growth has been fast in recent years, Sub-Saharan Africa’s mobile penetration still only stands at 43% and voice consumption is only 290 minutes per month on average which is less than half the level in India and far behind levels in Western countries. 

Voice is still the primary part of Airtel’s telecom operations with 140 million customers and makes up 56% of group mobile services revenue with 2.326 billion of voice revenue. From 2020-23, revenue has grown by 26% in reported currency (8% CAGR) and43% in constant currency (12.6% CAGR) driven by customer base growth from 110-140 million(8% CAGR) and constant ARPU. Airtel are prioritising customer base growth over price growth and given the African regulatory environment must negotiate with regulators over any potential price increases. Given that incremental margins are >50%, a focus on customer base growth makes more sense from both a political and economic standpoint. Growth in voice has continued its strong trajectory with a 11% constant currency revenue growth YTD and 13% growth in network minutes. 

On top of the low levels of Sim Card penetration and voice consumption driving increased usage levels and customer count, Airtel is investing in growth and LTM has increased their number of network towers by 9%. This is reflected in 89% of their capex being geared towards growth initiatives. In reality, a large portion of this is necessary to maintain their competitive positioning but 27% of their total capex is on fiber buildouts and increased network coverage with further spend on improved connection speeds. It is worth noting that despite considerable growth investments and capacity buildouts, group-wide capex intensity is only ~15%. Airtel Africa can pursue growth without having to plow a greater portion of revenues into capex than Western peers given lower build costs in Africa with the average build cost of a cell tower in Africa amounting to $90,000 or ~1/3 of the cost in the US and 50% lower than average costs in Western Europe. In essence, major capex and network upgrades are necessary given the rapid growth in mobile service demand in their geographies but this can be done at prices and ROEs far more attractive than Western peers and allow their customer base to grow alongisde the digitization of African society. ROCE has continued its upward trend from 16.5% in FY21 to 23.3% in FY23. This highlights the combination of high growth and high returns on incremental capital that is a feature of stocks that can compound at very high rates. 

While the voice business still comprises over half of Airtel’s mobile service revenue, the growth in data has been much faster and this segment is set to become Airtel’s dominant revenue stream by 2025 as Data revenue has grown from $930 million to $1.787 billion (24% CAGR) and a 33% CAGR in constant currency. Over this period, customer base has grown at a 15.5% CAGR. I expect this growth to continue given a 51% smartphone penetration in Subsaharan Africa which is forecast to rise to 88% by 2030 and the percent of mobile connections that are 4g rising from 22% to 49% by 2030. Notably, this will mean that 4g connections will benefit from a forecasted more than doubling in their percentage of total connections as well as a dramatic rise in the number of total connections and time spent using mobile networks. 

Although Airtel is the second largest African telecom company and enjoys a number one or number two market share in 13 of their 14 markets, there are numerous other competitors worth highlighting. MTN is the leader across Africa with 295 million total subscribers. In Nigeria, MTN has 77 million subscribers ahead of Airtel’s 50.5 million subscriber base. MTN are investing in their Nigerian network and further rolling out 4g sites to protect their leading market share in Nigeria as well as spending on spectrum additions. Safaricom is another key competitor with 66% Kenyan market share with Airtel controlling 33% of the market. On top of this, they are expanding into Ethiopia after the government opted to privatise the telecom sector but Airtel have elected to focus on their existing geographies and avoid bidding for licenses in Ethiopia. Additionally, Airtel competes with Vodacom in Tanzania, DRC and Ethiopia through their interest in a Safaricom-led consortium. In Tanzania and DRC, Airtel is the market leader in Tanzania and holds the second largest market share in DRC behind Vodacom.  

Mobile Money: 

While this segment is only 13% of revenue and 15% of EBITDA, it is a meaningful and growing part of Airtel on a consolidated basis. From 2020-23, customer base has grown from 18.3m to 31.5m (20% CAGR) and transaction value has grown from $20bn in 2018 to $84bn in 2023 (33% CAGR). Driven by these customer base and transaction value gains, revenue has grown from $311m in 2020 to $692million in 2023(30% CAGR) and EBITDA has grown from $150m to $344m in 2023(32% CAGR). It is worth noting that in 2021 Airtel sold minority stakes in their mobile money segment to TPG Rise Fund and Mastercard at a $2.65 billion valuation, while this was in a much more favourable interest rate and capital markets environment and Mastercard’s strategic reasons for their minority stake, it reassures me about the significant value embedded in this segment.  

The mobile money segment offers a suite or financial services including payment services, international money transfers, savings and micro loans and has partners including Western Union and Mastercard to facilitate their offerings of international money transfers and international online purchases. Typically, customers are onboarded as they top up their airtime and eventually use Airtel Money’s wide range of financial services. They benefit from ~80,000 retail touchpoints that customers come to buy SIM cards and airtime or other phone plans, many of these kiosks also offer financial services which provides a competitive advantage in the form of convenience and the added benefit of Airtel Africa’s trusted brand which is important in a part of the world rife with crime and fraud. Importantly, most consumers in Airtel’s core regions otherwise wouldn’t have access to any of these services with only 32% of adults in their operating regions having a financial institution account. On top of this strong growth runway, Airtel’s recent PSB license in Nigeria will further accelerate growth and management has signaled monetization of the Nigerian customer base should take place in the coming quarters. Yet, the current main focus in the mobile money segment is growing their customer base of 37 million through their network of 166,000 agents.  

Airtel does face competition with notable competitors including MTN Momo, M-Pesa(both are bigger than Airtel Money) Airtel is far from the only African telecom company that has leveraged their brand power and customer reach to provide financial services. MTN Momo and M-Pesa (owned by Safaricom and Vodacom) are the industry heavyweights with a respective $272bn and $274bn of respective transaction value, notably far ahead of Airtel Money’s own numbers. M-Pesa’s market-leading position can be explained by them being first to market in 2007 even though MTN and Airtel have a much larger customer base to penetrate. Vodacom offers M-Pesa services in all their operating regions except Kenya but holds an indirect stake in M-Pesa through their 35% ownership of Safaricom. They are also in the midst of building out their own financial services platform Vodapay with the app having over 4 million registered users and displaying meaningful growth. While M-Pesa, MTN Momo and Airtel Money are largely thought of as the big players, there are other emerging players including Wave which garnered a $1.7bn valuation and boasts over 10 million users. Many of Airtel’s competitors in this area are also telecom companies tapping into their existing subscriber base. Given Airtel’s positioning as the second largest telecom company in Africa they are poised to benefit from this trend and this has been evidenced in Airtel Money’s fast and consistent growth. This growth is unlikely to relent due to the strong growth trends of the African fintech market with PCM estimating 32% annualised growth to 2030. All in all, the African mobile money market exhibits an oligopolistic structure in which Airtel enjoys a cemented position and should continue to benefit from the industry’s future rapid growth. 

Currency risk: 

I believe a large reason for the undervaluation of Airtel is the complexity that comes with having operations in 10 different currencies across their footprint, of which 9 of these currencies have depreciated over the last five years. While my diligence suggests the growth characteristics and low valuation of the business outweigh the currency risk, it is nonetheless a factor that will have a notable impact on both business and share price performance.  

The Nigerian Naira is the main currency exposure of the group with YTD Nigeria revenues making up 33% of consolidated revenues. However, In Nigeria only 7% of opex is in foreign currency which has limited impact on margins with YTD EBITDA margins in fact rising by 47bps driven by efficiency measures. Finance costs are slightly more exposed to currency fluctuations with 40% of market debt being dollar-based but this will fall to only 21% as management pays down their $550 million holdco bond in May 2024 with management recently signalling further plans to reduce balance sheet foreign currency risk. Nonetheless, the 65% devaluation of the Naira YTD and the impact of other currency devaluations would have caused a 10.5% decline in reported revenues and 10.3% in EBITDA if that rate had been applied to consolidated results across the whole year as opposed to constant currency revenue growth of 21.6% YTD. Although margin effects are minimal given minimal foreign currency cost exposure, the absolute effects have been sizeable. 

On top of the Naira devaluation, the Zambian Kwacha, Malawi Kwacha and Kenyan Shilling have all notably devalued. Naturally, many investors aren’t comfortable with the uncertainty inherent in group revenue coming from 10 different African currencies that seem to face a constant stream of devaluations and a litany of other economic problems. I am not smart enough to accurately predict the course of forex markets(anyone who says they can is simply lying) but if you zoom out from this perfect storm of currency problems for Airtel, group-wide growth trends are still very encouraging. In constant currency, Q3 revenues and EBITDA have grown at an 18%and 22% 5 year CAGR and 22% and in reported currency these respective CAGRs are still 10% and 12%. This has been in spite of all but one of their currencies falling over the period and the Naira depreciating at >16%.  On average, the currencies in their region experience an average devaluation of 8-10% CAGR, the double-digit reported currency growth rates highlight the resilience and performance of the business. While my thesis doesn’t hinge on these currency trends reversing, I think any future currency movements can only surprise to the upside and find it highly unlikely that average currency devaluations surpass a 10% CAGR in the coming years. 

Management: 

Airtel’ Africas CEO Segun Ogunsanya became CEO in 2021 after 8 years of acting as CEO of the Nigeria segment. Given a lack of prior track record as a public CEO, I will focus on Ogunsanya’s plans for the business. While this is his first CEO role, in his brief stint as CEO his actions have seemed sensible with an emphasis on continuing the group’s growth in their core markets. This has been demonstrated by $779 million of capital expenditures and $500million of spectrum investment to grow their network and support ever-increasing voice and data needs of their customer base. This strategy is not only necessary to preserve market share in the face of competitors increasing network coverage and speed but also sensible from a return on capital perspective. Although management hasn’t broken out the ROI of their capex spend, I am encouraged by the underinvestment in African telecom infrastructure ensuring these projects lead to quick customer additions which is evidenced by group-wide ROCE of 23%. On top of this, I am encouraged by his decision to avoid expanding into Ethiopia against competition from well-established incumbents. I believe that Airtel can maximise shareholder returns by investing in its existing geographies and returning excess capital to shareholders which is exactly what Ogunsanya is doing. As a result of high barriers to entry into their markets and strong demand growth, management decisions so far seem prudent and there is little indication this will change. 

Naturally one may be concerned to hear that Bhakti Airtel holds a 56% stake in Airtel Africa with a further 15% owned by Bharti Overseas Private Limited. Sunil Mittal is the Bharti Airtel and Airtel Africa chairman while his son Shravin Mittal controls Bharti Overseas Private Limited. At first glance, this implies significant governance risk but under his chairmanship, the company has maintained a reasonable dividend alongside their capital expenditures and has again shown their commitment to shareholders with their minority sale of their mobile money segment and preliminary  plans to IPO its remaining majority stake. With the exception of minor lawsuits over the years, Sunil Mittal is a reputable and scrupulous businessman that has overseen a 20% CAGR at Bharti Airtel over 22 years, if anything his involvement and interest in Airtel Africa is a boon to the company. 

Capital allocation: 

Airtel’s capital allocation playbook is relatively simple with management prioritising investment in their network and debt pay down with excess cash being returned to shareholders. They have a mid-teens capex intensity with almost 90% of capex geared towards growth initiatives needed to maintain market share and support growing capacity needs of their customer base. Although significant capex is being spent on capacity and network expansion, management’s commentary around it is slightly misleading as this capex is needed to maintain market share especially given similar capex plans by competitors and their capex spend broadly tracks D&A. Nonetheless, I am encouraged by management including ROCE as a KPI and the clear flow-through of their capex to customer and revenue growth.  

Another core tenet of their capital allocation is a low leverage profile. Unlike Western peers that often run with over five turns of leverage, Airtel’s leverage ratio stands at 1.3x of which lease liabilities comprise 0.8x out of this 1.3x leverage ratio. Between FY19 and 23, leverage has come down from 3x, in line with management’s commitment to debt pay down. Currently, 40% of market debt is in foreign currency but in May this will fall to 21% with plans for further dollar debt pay down as the company is able to source dollars. Some investors may be disappointed with such a low level of leverage for a telco, especially with the growth potential they have and opportunity to buy back stock at depressed prices. Yet, given a 7.7% effective interest rate, I believe this level of financial discipline is prudent and hasn’t constrained their growth capex and spectrum investment.  

Despite significant internal investment and continued debt pay down, management pay a healthy dividend and have been opportunistically buying back shares. Airtel’s dividend yield is >4% with dividend increasing at a MSD-HSD rate each year. On top of this, there is a buyback authorization of $100 million in place over 12 months stating March 2024.  

All in all, their capital allocation playbook is simply investing in their network, maintaining their low debt levels and returning excess capital to shareholders without any mention of potential M&A. 

Valuation: 

Shares trade at 2.5x EV/FY23 EBITDA. Despite AAF’s superior growth characteristics to Western peers, their dominant position in their markets and their competitively advantaged and profitable mobile money business, this is a valuation far below any Western peer and broadly in line with peers MTN group at a 2.3x EV/EBITDA and Safaricom’s 4.5x EV/EBITDA. Given their higher cost of capital than Western peers this is certainly not an apples-to-apples comparison but this valuation is stupidly low and clearly driven by a lack of institutional appetite for the stock given Bharti Airtel’s majority shareholding, currency and geopolitical risk and being an LSE listed company reporting earnings in USD as well as screening poorly given recent currency losses following the naira’s devaluation. I think there’s no reason that the business can’t grow EBITDA at 12% on a reported basis given their >50% incremental margins and the aforementioned market characteristics. I believe it is very reasonable the company could reach a 5x EV/EBITDA by 2027 (which doesn’t pay credit to a likely AIrtel Money IPO at a double-digit EBITDA multiple that could see them receive cash that covers over half of the market cap) which could see shares reaching £3.60/share, more than three times higher than current levels along with excess cash flow of 80p/share by fy27 which can support their dividend yield and perhaps see further buybacks or growth initiatives. All in all, this could mean a > 50% annualised TSR to fy27 and if I embed no multiple re-rating stock price annualized TSR still comes in at 34%. This upside incorporates their standard rate of weighted currency depreciation which simply highlights the margin of safety at current prices. 

Catalyst

Airtel Money IPO

Buyback dividend

Continuation of growth

Value is a catalyst