Airtel Africa Plc – Completed two strategic partnership

Airtel Africa Plc (LON: AAF) is a provider of telecommunication and mobile money services, with a footprint in 14 African countries, primarily in East Africa, Central Africa, and West Africa.

Rationale for Valuation – Watch at GBX 57.00

• The debt-equity ratio was higher against the industry, reflecting that the Company is highly leveraged as compared to the industry.
• The Company faces pressure on pricing and margins due to the mature and highly competitive markets.
• The stock has underperformed with the index during the one-month period and delivered a negative return in the last nine months.

Recent News

On 20 August 2020, the Company announced a strategic partnership with MoneyGram. MoneyGram is a global leader, which provides a cross-border P2P (person-to-person) payments and money transfers. This partnership was in line with the Group’s strategy. The strategic partnership will expand the range and depth of Airtel money to drive customer growth and penetration.

On 13 August 2020, it also announced a strategic partnership with Standard Chartered Bank, to co-create new innovative products, which will enhance the accessibility of financial services and better serve people across Africa.

Q1 FY21 Trading Update (for the quarter ended 30 June 2020, as on 24 July 2020)

 (Source: Company Website)

• The Company witnessed a good start to the year, with a constant currency revenue growth of 13% year-on-year, despite the impact of Covid-19.
• The revenue growth was mainly driven by the growth of the customer base (increased by 11.8% year-on-year to 111.5 million) and ARPU (average revenue per user) growth of 1.6% in constant currency. It has also recorded growth in all key business segments.
• Led by an increase in cash of US$680 million from the IPO proceeds and US$122 million proceeds from the cancellation of derivatives, the net debt decreased by US$656 million year-on-year.

One Year Share Price Chart

Daily Chart as of August 28, 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The novel COVID-19 pandemic has impacted the global economy, causing massive disruptions in the movement of people and the global supply chain. A slowdown in the growth of telecommunications and mobile money services could adversely affect the demand for communication sites and tower space. The strategic partnership would face disruption and economic hardship due to COVID-19 pandemic.

Technical Analysis

From the technical standpoint, the shares were trading below the short-term support level of 50-day simple moving average prices, which reflects a downward trend in the stock.

Valuation Methodology

Conclusion

The recent strategic partnership (MoneyGram and Standard Chartered Bank) will boost the customer base. It also created a partnership with UNICEF (United Nations Children's Fund) in Q1 FY21. However, the outlook stays uncertain, due to the second wave of infections and the actions governments would decide to take in that event. The Company faces pressure on pricing and margins due to the mature and highly competitive markets it operates in, and material adverse changes in certain raw material prices could affect the profitability of the Group.

Overall, the Company witnessed a resilient performance with all key business segments (voice, data, and mobile money) and all regions. On leverage front, the debt-equity ratio was higher as compared to the industry median, reflecting that the Company is highly leveraged as compared to the industry. In the last one month, AAF shows that the stock has underperformed with the index (FTMC 250 index). Further, the Company’s stock has delivered a negative return of around 25.18% in the last nine months. The stock made a 52-week low and high of GBX 25.74 and GBX 82.45, respectively.

Therefore, based on the above rationale, we have given a “Watch” stance on Airtel Africa at the closing price of GBX 57.00 as on 28 August 2020, while we look for investment opportunities for growth in the core businesses in the near term.

Helios Towers Plc – Decent Return and Consistent Growth

Helios Towers PLC (LON: HTWS) is a United Kingdom-based telecommunications company, which owns and operates passive infrastructure and telecommunications towers in five high-growth African markets.

Rationale for Valuation – Watch at GBX 153

• The outlook remains tough across the main markets, and P/CF, EV/EBITDA and EV/Sales multiples are higher against the industry, reflecting overstretched valuations.
• Profitability and ROE were lower than the industry median.
• The stock has underperformed with the index during the one-month period and delivered a negative return in the last month.

Recent News

On 14 August 2020, the Bat Hanadiv Foundation No. 3 had sold around 18.3 million existing ordinary shares in Helios Towers.

On 13 August 2020, the Company announced the appointment of Carole Wamuyu Wainaina, as a Non-Executive Director, to the Board of HTWS.

Financial and Operational Highlights (H1 FY2020)

(Source: Company Website)

• The Company’s revenue increased by 7% year-on-year, driven by continued growth in tenancies across the Group and the number of sites.
• Recently, HTWS signed an agreement with Free Senega to acquire the 1,220-tower portfolio. This contains an upfront cash consideration of €160 million.
• In Q2 FY20, the Company has signed two bolt-on acquisitions, reflecting 80 sites across South Africa and Congo Brazzaville, with 19 additional sites expected later in the year.
• The adjusted EBITDA increased by 10% year-on-year, with an adjusted EBITDA margin at 53%. This increase reflects continued improvements in operational efficiency and tenancy growth.

One Year Share Price Chart

Daily Chart as of August 28, 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The ongoing impact of the Covid-19 pandemic could materially and adversely affect the operational and financial performance of the Group across all the activities. A slowdown in the growth of wireless communication services could adversely affect the demand for communication sites and tower space. Recently, the Company has signed an agreement for various sites, which could affect the operations of the Company (if they fail to integrate new lines of business in new markets).

Technical Analysis

From the technical standpoint, shares were trading well below the short-term support level of 20-day simple moving average prices, which reflects a downward trend in the stock and carrying the potential to move down further.

Conclusion

Till date, there has been no significant operational impact from COVID-19. The first-half performance was in line with expectations. However, the Company faces pressure on pricing and margins. Due to a higher level of debt, the Company might enter credit risk in the near future. Reported profitability metrics were lower against the industry median. In the last one month, HTWS shows that the stock has underperformed with the index (FTMC 250 index). Further, the Company’s stock has delivered a negative return of around 5.99% in the last month. The Company’s EV/EBITDA, EV/Sales and Price/Cash Flow multiples are trading higher against the industry multiples, reflecting overstretched valuation. The stock made a 52-week low and high of GBX 81.95 and GBX 223.85, respectively.

Based on the above rationale, we have given a “Watch” stance on Helios Towers at the closing market price of GBX 153.00 as on 28 August 2020, while we will look for catalysts in the near term such as shown modest signs in the economy of recovery. 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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