Expanding Mobile Money And 4G Will Brighten Nigeria Telecom Outlook

Key Takeaways

• Strong revenue growth driven by increased smartphone penetration and mobile money customer base expansion, with strategic investments in 4G and network improvements.
  
• Efforts to reduce foreign currency debt and optimize local financing aim to increase net margins by mitigating currency risk exposure.
  
• Currency volatility and high leverage pose financial risks, while network investments, regulatory challenges, and low smartphone penetration threaten revenue and profitability growth.

Catalysts

Provides telecommunications and mobile money services in Nigeria, East Africa, and Francophone Africa.

• Airtel Africa is focusing on increasing smartphone penetration and expanding its mobile money customer base, which should drive revenue growth as more users access data services and engage with the financial ecosystem.
  
• Despite currency volatility, the company is experiencing strong constant currency revenue growth, particularly in Nigeria and East Africa, indicating a sustainable path for future revenue increases.
  
• The strategic focus on expanding voice and data services, supported by investments in 4G coverage and network improvements, is expected to improve earnings as data usage per customer continues to grow.
  
• The recent approval for tariff adjustments in Nigeria presents a catalyst for potential revenue uplift and EBITDA margin improvement, assuming manageable competition and customer response to the price changes.
  
• Continued efforts to decrease foreign currency debt and optimize local financing are expected to reduce financial costs and increase net margins by mitigating exposure to currency risks.

Airtel Africa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Airtel Africa's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $928.3 million (and earnings per share of $0.26) by about April 2028, up from $60.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.1 billion in earnings, and the most bearish expecting $672.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 139.8x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 72.9x.
• Analysts expect the number of shares outstanding to decline by 1.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.42%, as per the Simply Wall St company report.

Airtel Africa Future Earnings Per Share Growth

Risks

• Currency volatility remains a significant risk, impacting reported currency revenues and potentially leading to fluctuations in earnings due to foreign exchange exposure, especially given the past year’s headwinds.
  
• The company faces challenges with network investment needs, which could pressure capital expenditure requirements and strain cash flows, affecting net margins and profitability if not managed efficiently.
  
• High leverage levels, with the group leverage rising to 2.4x, could increase financial risk and impact net margins, particularly as it stems from extending tower lease agreements, which adds complexity to balance sheet management.
  
• Regulatory risks in Nigeria, including the uncertain impact of tariff adjustments on consumer demand and potential competitive pressures, could affect revenue growth and strain profitability if demand elasticity is unfavorable.
  
• The low level of smartphone penetration in key markets, despite growth opportunities, still poses a risk that revenue growth could plateau if penetration does not increase quickly enough to sustain mobile and data service expansion.

Valuation

• The analysts have a consensus price target of £1.772 for Airtel Africa based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.88, and the most bearish reporting a price target of just £1.08.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $928.3 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of £1.72, the analyst price target of £1.77 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.