It is somewhat ironic that for a communications company there is so little coverage of Airtel Africa (AAF) in the financial press.

As a result, it may surprise many readers to discover that the firm, which only listed in mid-2019, is already a FTSE 100 constituent.

Its latest set of financial results beat estimates. They show the company is increasingly profitable and has a long runway of growth ahead of it.

IMPRESSIVE GROWTH

Airtel Africa is a subsidiary of Indian telecoms giant Bharti Airtel and is currently valued at £5.5 billion compared with £19 billion for BT (BT.A).

The firm is the second-biggest player in the African continent, which Bharti Airtel chairman Sunil Bharti Mittal calls ‘the next global growth frontier’, behind Johannesburg-listed MTN (MTN:JSE).

Airtel entered the African mobile market in 2010 and after a slow start now has over 125 million customers and 45 million data subscribers across 14 different countries.

As well as offering affordable services, the company has innovated with its data and its payments facilities and now has nearly 26 million Airtel Money users.

In terms of its network Airtel has significant spectrum, links with 2,800 partners including IT and telecom infrastructure providers, and it owns over 60,000 kilometres of fibre.

Its retail presence is vast with over 60,000 exclusive retail ‘touchpoints’ including mini shops, kiosks and Airtel Money branches, together with 225,000 activating agents including freelancers.

This has helped the company generate 16 consecutive quarters of double-digit revenue growth and rising pre-tax operating margins.

HIGH MARGINS

As the number one or two operator in each of its 14 markets Airtel offers scale in a region with substantial growth potential.

The company has invested heavily in 4G infrastructure and modernising the network in countries such as Kenya, Malawi, Rwanda, Uganda and Zambia in recent years to provide customers with access to digital services such as data and mobile payments.

In its results for the nine months to December 2021, revenue in constant currency terms grew faster than expected to $3.49 billion, almost a 25% increase, driven by strong demand in Nigeria and East Africa.

At the same time, earnings before interest, tax, depreciation and amortisation – better known as EBITDA – also grew faster than expected, up 34% to $1.7 billion, meaning the firm made an operating margin of 48.8%.

By comparison, rival MTN reported an operating margin of 44.5% in its results for 2021, and in its first-half earnings report Vodafone (VOD) registered a 33.6% operating margin.

We have included Vodafone as a comparator as it is also a player in the African market, and its M-Pesa financial services platform is making an important contribution to group growth as demand for mobile payment services takes off.

RELATIVELY LOW-RISK

Considering Airtel Africa operates in what are classified as emerging markets, its share price has been remarkably resilient during the Covid crisis and more recently during the invasion of Ukraine.

Investors typically try to cut their risk exposure at times of market stress, and emerging markets are seen as fairly high on the risk spectrum, yet Airtel’s shares have remained in favour and are currently trading close to their highest level since the company joined the UK stock market.

That isn’t to say the shares are risk-free, however. There are some concerns over the future regulatory situation in Nigeria as well as potential restrictions on dividend repatriation from some of the company’s subsidiaries.

There is also the possibility that other companies try to enter its markets, attracted by its high margins.

Meanwhile, some fixed-income investors have expressed concerns over the group’s debt being denominated in US dollars and the risk that if the dollar goes up, so does the interest cost on the debt.

However, thanks to its strong operating cash flow, which climbed 40% in the nine months to December, as well as the success of Airtel Money and the proceeds from the sale of some of its mobile towers, the firm reduced its net debt to EBITDA ratio to 1.4 times from 2.1 times a year earlier.

EXPERT VIEWS

The research team at JPMorgan described the forecast-beating third quarter earnings as ‘further evidence of strong execution which is likely to support a re-rating’.

The analysts flagged the fact growth in mobile money revenue was driven both by higher average revenue per user and higher transaction values.

With a licence expected to be approved in Nigeria this year, money services are likely to remain a strong driver for the group.

Goldman Sachs called the results ‘positive given the persistent growth across both operational segments – mobile, data and mobile money – as well as the geographical footprint’.

It added: ‘We remain positive on management’s commitment to further optimise the balance sheet, with net debt to EBITDA trending downwards, while growth in operating cash flow is supportive of the outlook going forward.’

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