Mobile Data Boom Will Drive Long Term Tower Tenancy Expansion

Catalysts

About Helios Towers

Helios Towers owns and operates telecom tower infrastructure across high-growth African and Middle Eastern markets, generating lease revenues from mobile network operators.

What are the underlying business or industry changes driving this perspective?

• Rapid expansion in mobile subscribers and a forecast fourfold increase in data usage by 2030 across Helios Towers markets is set to sustain strong tenancy additions and double digit revenue growth over many years, supporting continued EBITDA expansion.
• Population growth of around 3% per year, with populations in core markets projected to almost double by 2050, underpins long term network rollout and densification. This reinforces visibility on rising tenancy ratios and structurally higher earnings.
• The highly scalable tower model, where incremental tenants require limited additional CapEx or OpEx, should drive further margin expansion as the group progresses towards and potentially beyond its 2.2 tenants per site objective. This would lift net margins and return on invested capital.
• Enhanced capital allocation discipline, with priority on high returning organic growth and deleveraging, combined with improving credit ratings and lower cost of debt, is likely to accelerate free cash flow growth and ultimately support higher shareholder returns and earnings per share.
• Long dated, inflation linked contracts with blue chip mobile operators in predominantly hard currency markets provide resilient, compounding cash flows. This should translate forecast tenancy growth more directly into higher EBITDA, expanding free cash flow and lower leverage over time.

Assumptions

This narrative explores a more optimistic perspective on Helios Towers compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Helios Towers's revenue will grow by 10.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.3% today to 19.7% in 3 years time.
• The bullish analysts expect earnings to reach $218.4 million (and earnings per share of $0.21) by about December 2028, up from $84.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $142.9 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, down from 26.1x today. This future PE is greater than the current PE for the GB Telecom industry at 15.7x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.23%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Long-term mobile data and subscriber growth across Africa and the Middle East could fall short of current megatrend expectations if economic development, smartphone affordability or regulatory conditions slow. This would reduce the volume of new tenancies and weigh on revenue growth and earnings.
• Helios Towers' strategy and financial targets depend heavily on sustaining high tenancy additions and increasing the tenancy ratio from 2.11 towards and beyond 2.2. Any prolonged slowdown in customer network rollouts or technology upgrades such as 4G and 5G would limit operating leverage and keep net margins and return on invested capital below bullish assumptions.
• The business model relies on fixed cost infrastructure, long dated contracts and hard currency exposure across volatile emerging markets. Adverse FX moves, inflation spikes, political instability or customer stress could erode the real value of contracted revenues and compress EBITDA margins and free cash flow over time.
• Although management is prioritising deleveraging, the company still operates with elevated net leverage at 3.8 times and plans to fund significant discretionary capital expenditure. Any deterioration in credit conditions, refinancing setbacks or execution issues on new builds could increase financing costs and reduce net income and free cash flow available to shareholders.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Helios Towers is £2.54, which represents up to two standard deviations above the consensus price target of £2.08. This valuation is based on what can be assumed as the expectations of Helios Towers's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.54, and the most bearish reporting a price target of just £1.77.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $218.4 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of £1.59, the analyst price target of £2.54 is 37.4% higher.
  
• 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.