July 27, 2023/CSL Research

Airtel Africa Q1 2024 numbers were buoyed largely by growth in voice revenue (+1.9% y/y to US$621m) and data revenue (+16.3% y/y to US$486m) amidst an inflationary growth in Direct Network Operating Costs (+16.5% y/y to US$268m). However, the company’s bottom line performance was heavily impacted by significant FX losses, which resulted in a significant increase in the company’s Net Finance Cost (351.5% y/y to US$683m), causing Profit before Tax which declined by 180.1% y/y to US$221m compared US$276m in Q1 2023. 

We believe that Airtel Africa is well positioned to benefit from further growth in mobile and data penetration in Nigeria’s telecommunications industry. Additionally, the significant investments made by the firm in network infrastructure and expanding data coverage should help improve the quality of the company’s network. That said, we believe the additional cost incurred as a result of the expansion will significantly affect the company’s profitability in the short term. 

We note that Airtel Africa’s dual-listing status offers a route for dollar repatriation for foreign investors and sometimes provides arbitrage opportunities. This has contributed to boosting the stock price significantly. Given the renewed interest in the market, we expect the impact of this arbitrage opportunity to moderate in the medium to long term as we have already begun to observe. We have a price target of N1466.4/s with a HOLD recommendation. Our target price implies an 11.1% potential upside from the last closing price of N1319.9/s on 27 July 2023. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation assigning a weighting of 60:40. 

Despite a challenging business environment, Airtel Nigeria has maintained steady growth in Revenue, increasing by 9.9% y/y to US$1,384m (including other revenues) in Q1 2024. The strong growth in Revenue was on the back of growth in voice (+1.9% y/y to US$621m) and data revenue (+16.3% y/y to US$486m). The growth in voice Revenue was supported by an increase in subscriber base (+8.8% to US$143m), relatively stable tariffs, and the company’s focus on pro-consumer activities. Data Revenue growth on the other hand was supported by an increase in the number of smart phones on the firm’s network, greater data usage, and growth in the number of active data users. On the back of increased digital consciousness, we saw active data subscribers grow by 22% y/y to 56.8 million in Q1 2024. 

We expect moderate growth in voice Revenue as the company continues its steady recovery of voice subscribers lost to the NIN-SIM linkage debacle. We note that the steady growth in digital consciousness poses a threat to voice Revenue. Overall, we estimate Voice Revenue to grow by 5% in 2024e, compared to the growth of 6% reported in 2023. We also estimate the contribution of voice Revenue to overall Revenue will moderate to 50.13% in 2024e from 56.43% in 2023.  

However, we believe the decline in voice Revenue will be compensated for by growth in non-voice Revenue especially mobile data and Mobile Financial Services (MFS). Rising smart phone penetration, increasing mobile broadband penetration, improving network quality, and attractive data offerings should spur rapid growth in data usage and improve data Revenue.  

We highlight that Airtel has rolled out its 5G spectrum in 4 states in its Nigeria operation and has added an additional spectrum for its 4G network, which we believe will increase its network quality thereby having a positive effect on revenues. We believe that the continued roll out of its 5G spectrum in more states of its Nigeria’s operation will contribute significantly to the company’s Revenues. Overall, we believe that data subscribers would increase significantly in the interim. Hence, we project a growth of 24% in data Revenue in 2024e. We also estimate that the contribution of data Revenue to total Revenue will improve to 46.29% in 2024.  

Notably, Airtel added 3.1 million customers to its network, leading to an increase in subscriber base to 143.1 million as of Q1 2024. Considering Airtel’s strong footing in the Nigerian telecoms market, we believe the company is well-positioned to benefit from further growth in mobile and data penetration in Nigeria’s telecommunications industry.  

Additionally, the significant investments made by the firm in network infrastructure and expanding data coverage should enable the company to retain existing customers while innovative data bundle offerings should help attract customers to its network. Airtel incurred CAPEX of US$140m in Q1 2024. Airtel has redirected capex from voice to data communication as a significant portion of capex is now targeted towards network expansion/upgrade and optimization for data.   We note that Direct Network Operating Costs increased by 16.5% y/y to US$268m. Given rising inflationary pressures, we expect Direct Operating Costs to remain pressured, we are forecasting a rise of Network cost to 27% in 2024e. 

Operating Expenses rose by 4.6% y/y to US$434m in Q1 2024 from US$415m in Q1 2023. EBITDA increased by 11.1% y/y to US$682m in Q1 2024 from US$614m in Q1 2023. In addition, EBITDA margin increased marginally, by 51bps y/y to 49.3% in Q1 2024. Operating Profit grew by 8.7% y/y to US$462m in Q1 2024 from US$425m in Q1 2023 despite an increase in Depreciation & Amortisation to US$220m in Q1 2024.

Net Finance Cost increased, up 351.5% y/y to US$683m in Q1 2024 from N151m in Q1 2023. The elevated Net Finance Cost mirrors the 342.9% y/y increase in Finance Cost despite a 60% y/y rise in Finance Income. We note that Net finance costs were significantly impacted by the Naira devaluation which resulted in a Net FX loss of US$471m, this reflects the impact of the revaluation of USD balance sheet liabilities and derivatives in Nigeria. US$360m of the US$471m FX losses could be attributed to the revaluation of USD liabilities held on the Nigerian subsidiary balance sheet, while the rest of the loss was attributed to the revaluation of derivative instruments. The increase in Net Finance cost caused Profit before Tax to decline by 180.1% y/y to US$221m compared with US$276m in Q1 2023. 

Outlook 

According to the Nigerian Communications Commission (NCC), Nigeria’s mobile subscriptions remain high, with mobile subscribers hitting 220.9 million in May 2023. The growth in mobile connections is projected to be driven by further uptake of mobile services, especially in rural areas, enabled by the improving affordability of mobile services to lower income population. 

Total mobile service Revenue is expected to grow exponentially driven by increased contribution from data amidst an expected decline in voice Revenue. Data Revenue is forecasted to grow on the back of the recent rollout of the 5G network and the continuous expansion of the 4G network. As telecoms begin to diversify, the fintech segment is expected to contribute significantly to data revenue in the long term, as people embrace digital banking. Looking ahead, we believe growth in mobile revenues will be driven by new technologies, increasing smartphone usage, and rising digital consciousness.

On 29 April 2022, Airtel Management confirmed that the company had received final approval for a full Payment Service Bank (‘PSB’) licence for ‘Smartcash’, from the Central Bank of Nigeria (‘CBN’), The company has invested in building relevant IT infrastructure and business systems and processes to get this PSB business fully operational. We believe that in the medium to long term, Smartcash will contribute significantly to the total Revenue of the company. 

Given the revaluation of the company’s balance sheet using the exchange rate of N767 to US$1, we do not envisage significant further FX losses assuming Nigeria’s exchange rate remains stable for the remainder of the year. 

We note that Airtel Africa’s dual-listing status offers a route for dollar repatriation for foreign investors and sometimes provides arbitrage opportunities. This has contributed to boosting the stock price significantly. Given the renewed interest in the market, we expect the impact of this arbitrage opportunity to moderate in the medium to long term as we have already begun to observe. Also, the FX convergence policy of the new administration, which is expected to boost the availability of FX in the country, may remove the need to repatriate funds through this means. 

Overall, we believe that Airtel is well positioned to take advantage of possible opportunities the sector will avail, given the considerable amount of investment that the company has made to expand its current network and further roll out of the 5G spectrum.  

Valuation 

We have a price target of N1466.4/s with a HOLD recommendation. Our target price implies an 11.1% potential upside from the last closing price of N1319.9/s on 27 July 2023. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation assigning a weighting of 60:40.