Extended Nigeria Contracts And Tax Cuts Will Improve Cash Flow

Key Takeaways

• Extended contracts with key customers improve financial visibility and long-term revenue growth while supporting increased contracted revenue.
  
• Reducing CapEx and strategic asset disposals are expected to enhance net margins, earnings, and cash flow generation.
  
• IHS's financial stability is challenged by currency fluctuations, restructuring efforts, and strategic asset disposals potentially affecting revenue and cash flow.

Catalysts

Develops, owns, and operates shared communications infrastructure in Nigeria, Sub-Saharan Africa, the Middle East and North Africa, and Latin America.

• IHS Holding has extended commercial contracts with key customers into the next decade. This significantly improves financial visibility, increases contracted revenue, and supports long-term revenue growth.
  
• The company's strategic focus on increasing profitability and reducing CapEx is expected to enhance cash flow generation, positively impacting their net margins and earnings in the future.
  
• Nigeria's recent regulatory tariff increases for mobile network carriers should enable carriers to invest more in CapEx, benefiting IHS's growth, revenue, and tenant lease expansions.
  
• The reduction in withholding tax rates in Nigeria from 10% to 2% starting in 2025 is likely to support cash flow generation, further strengthening net margins and earnings.
  
• Continued strategic asset disposals are expected to reduce debt and leverage further, leading to potentially favorable impacts on net margins and earnings through decreased interest expenses and improved balance sheet health.

IHS Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IHS Holding's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -95.4% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $222.4 million (and earnings per share of $0.66) by about May 2028, up from $-1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $321.9 million in earnings, and the most bearish expecting $113.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Telecom industry at 17.0x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

IHS Holding Future Earnings Per Share Growth

Risks

• IHS's revenue from Nigeria, its largest market, faces vulnerability due to currency fluctuations, such as the significant Naira devaluation, impacting revenue and adjusted EBITDA margins significantly.
  
• The disposal of IHS Kuwait and not commencing operations in Egypt indicate restructuring efforts that might reduce geographical revenue streams and could affect overall revenue growth.
  
• The company's emphasis on strategic asset disposals (targeting $500 million to $1 billion) could imply divesting potentially revenue-generating parts of the business, affecting future revenue streams.
  
• Higher interest costs following bond refinancing in November 2024 affected the adjusted levered free cash flow (ALFCF), potentially impacting future cash flow generation if interest rates rise or refinancing becomes more expensive.
  
• Continued exposure to FX volatility, such as further Naira devaluation, could negatively affect the financial results by impacting the revenue and adjusted EBITDA in IHS's largest revenue-generating markets.

Valuation

• The analysts have a consensus price target of $7.636 for IHS Holding 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 $16.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $222.4 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $6.28, the analyst price target of $7.64 is 17.8% 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.