When it comes to telecommunications in sub-Saharan Africa, Airtel Africa (OTCPK:AAFRF) is in a league of its own. In particular, AAFRF has increased its 4G coverage to facilitate the growth of the mobile data market. My bull case of AAFRF stems from its strong growth potential and the potential value of mobile money which is not priced in. In general, I am pleased with the 3Q23 results, and I am especially pleased with AAFRF’s ability to sustain its high margins despite the inflationary climate. The operational outlook for AAFRF remains promising, and I anticipate further OCF growth.
Third quarter revenue of $1.35 billion for AAFRF was up 11% last year and 3% sequentially, which is in line with expectations. Increases in revenue from all regions and types of business contributed to the growth, especially in Nigeria and the mobile money industry. Consequently, EBITDA grew at a similar rate to USD661 million, in line with expectations. AAFRF net income increased by 11% year over year and 29% q/q.
AAFRF’s stock price has been oversold since the company announced its earnings, in my opinion. Among the many factors contributing to this conclusion is the group’s improved financial stability as a result of a $800 million cash repatriation. This is especially true after spending so much money on spectrum acquisitions last year. Balance sheet aside, a key highlight was Nigeria’s strong revenue growth of 23.1% (which accelerated), driving margin expansion. What’s more, operating FCF grew in accordingly alongside AAFRF overall business performance. Furthermore, I believe the substantial mobile money opportunity in Nigeria has not yet been factored into the share price at all. As such, I believe this drop in share price presents a pretty attractive entry point to start accumulating some shares.
Subscriber numbers rose by 10%, to 138.5 million, as mobile data and mobile money services became more adopted. The increased use of voice, data, and mobile money drove the 7.2% increase in ARPU (after adjusting for currency fluctuations). Also, the growth in EBITDA resulted in a 15% increase in operating cash flow [OCF], which totaled USD1.45 billion. Capital expenditures grew by about 6%.
Strong subscriber and APRU growth boosted revenue in 3Q23 naira, but management predicted a $87 million revenue drag from the NIN-SIM regulation in 9M23. I expect the situation to return to normal after April 23rd, when Nigeria no longer needs to adhere to the regulation set out by NIN. This, in addition to the AAFRF recent spectrum purchases, the launch of its mobile money service in Nigeria, and the possibility of price increases due to inflation, are all factors that could spur growth at AAFR. As some background on the NIN problem, in April 2022, 13.6 million subscribers had their voice services cut off because they had failed to submit their NINs. As of the end of 2022, 3.2 million customers have been fully verified and unblocked after submitting their NINs, bringing the total number of customers who have submitted their NINs to 6.2 million.
CAPEX & Balance sheet
Capex increased by 5.8% year over year to USD457 million mainly due to spectrum acquisitions in Nigeria, the Democratic Republic of the Congo, Tanzania, Zambia, and Kenya. Specifically in Nigeria, AAFRF announced in January 2023 that it had acquired spectrum from the Nigerian Communications Commissions for a total gross consideration of USD316.7 million. This new spectrum will allow for the expansion of mobile data networks as well as fixed wireless home broadband, paving the way for the deployment of 5G.
As for the balance sheet, AAFRF has paid off USD450 million debt, with the remaining USD550 million due in May of 2024. Leverage has gone up to 1.4x due in large part to buying of spectrum in Nigeria.
A large part of me finding AAFRF attractive is because of the undemanding valuation it trades at today. Essentially, I believe that the earnings of AAFRF are supported by positive growth factors in data, margin expansion, and mobile money that have not yet been reflected in its current valuation. The launch of mobile money in Nigeria is likely to drive significant growth in revenue, potentially leading to a higher valuation multiple for AAFRF in the future (this potential increase in valuation is not accounted for in my model).
The 3Q23 results were positive, with a revenue increase of 11% YoY and EBITDA growth of similar magnitude. Looking over the long-term, I am bullish on AAFRF due to its strong growth potential to drive more OCF and the potential value of mobile money.
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