November 7, 2023/CSL Research

Airtel Africa’s H1 2024 numbers were buoyed largely by growth in mobile money revenue (up 25.5% y/y to US$416m) and data revenue (+5.9% y/y to US$915m) amidst a decline in voice revenue (-4.6% to US$1.16m). However, the company’s bottom line performance was significantly impacted by FX losses, which resulted in a spike in the company’s Net Finance Cost (+144.1% y/y to US$873m), causing Profit before Tax to decline by 97.7% y/y to US$12m compared with US$330m in H1 2022.

The growth in mobile money revenue was driven by growth in both East Africa and Francophone Africa (+26% and +21% respectively). The management communicated the existence of untapped opportunities for mobile money revenue growth across its African footprints, given the limited penetration of traditional banking services in those climes. We believe Airtel Africa is well-positioned to benefit from further growth in mobile money and data penetration in Nigeria’s telecommunications industry. Additionally, the significant investments made by the firm in network infrastructure and in expanding data coverage should help improve the quality of the company’s services.

That said, we believe the increase in the company’s net finance cost as a result of the naira devaluation amidst only a marginal growth in Revenue will impact the company’s profitability in the short term. We maintain our price target of N1466.4/s but we downgrade to a SELL recommendation as our target price implies an 18.1% downside from the last closing price of N1790/s on 07 November 2023. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation assigning a weighting of 60:40.

Despite the challenging macroeconomic and operating environment, Airtel Africa’s H1 2024 recently released financials showed that the company’s Revenue grew marginally by 2.3%, to US$2.6bn from US$2.56bn in H1 2023. On a q/q basis, Total Revenue declined by 10% to US$1.25bn in Q2 2024 from US$1.38bn in Q1 2024. Growth in mobile money Revenue was the major driver of the rise in Total Revenue.

Data Revenue remained resilient in H1 2024, increasing by 5.9% y/y to US$915m from US$864m in H1 2023. The growth in Data Revenue could be attributed to increased usage (supported by the enhanced capacity through network expansion) and smartphone penetration. The company also noted that its expansion of the 4G network and improved user experience has helped drive increased smartphone penetration, customer, and ARPU, across the segments.

Smartphone penetration was up 2.6ppt to 37.7% y/y and data subscribers grew by 23.0% y/y, now representing 40.5% of the company’s total base. Data usage per customer per month also grew by 19.4% and reached 5.1 GB per month from 4.3 GB a year ago. The increase in the company’s data subscribers was led by increased smartphone penetration and an expansion of its home broadband and enterprise customers. 4G handset users’ data usage now constitutes 79.6% of total data usage on the network in Q2’24 indicating a growth of 53.9%.

The management noted their commitment to expanding the company’s 4G network, while also launching new 5G technology in key markets including Kenya, Nigeria, Tanzania, Uganda, and Zambia. Also, expanding its network coverage in rural areas remains a key priority for the company, through new site rollouts, additional spectrum, and new technology investments across its markets despite the high inflationary environment. We believe these investments in the company’s data coverage will contribute significantly to growth in data Revenue, making us project a 24% y/y growth in data Revenue in 2024e. We also estimate that the contribution of data Revenue to total Revenue will improve to 45% in 2024 from 34% in 2023.

Voice Revenue declined by 4.6% to US$1.16m from US$1.22m in H1 2023. Despite the drop, the company reported that its total customer base grew by 9.7% to 147.7 million y/y. We believe the growing digital consciousness contributed to the decline in voice Revenue. We believe voice Revenue will continue to decline; hence, we estimate a 5% growth in voice Revenue in 2024e, compared to the growth of 6% reported in 2023. We also estimate the contribution of voice Revenue to total Revenue will moderate to 44.7% in 2024e from 47.40% in 2023.

That said, we maintain that the decline in voice Revenue will be compensated for by growth in non-voice Revenue especially mobile data and Mobile Financial Services (MFS). We note a significant improvement in mobile money Revenue, up 25.5% y/y to US$416m from US$332m in H1 2023. The growth in mobile money Revenue was driven by mobile money Revenue growth in both East Africa and Francophone Africa, (up 26% and 21% respectively).

The company’s distribution expansion and enhanced offerings helped drive a 23.1% growth in its mobile money customer base, now serving 36.5 million customers, which represents 24.8% of its total customer base The number of Airtel Money kiosks and mini shops increased by 31% and Airtel money branches by over 9%. Furthermore, the company’s mobile money agents expanded by 46%, following the implementation of its digital on-boarding project.

In Nigeria, the company remains committed to growing its mobile money customer base. In Q2 2024, the company had 1.9 million active customers registered for mobile money services versus 1.5 million in the quarter ended June 2023. The expansion of the company’s customer base was driven by the expansion of its distribution network, particularly its exclusive channels of Airtel money branches and kiosks. The company noted that it added over 47,000 Airtel money agents in Q2 2024 and reached almost 115,000 agents as of 30 September 2023.

While we note that the company has not started reporting Revenues from its Nigeria mobile money segment, we believe the growth of the company’s mobile money customer base and agents points to growth in its Nigeria operations. We agree with the company’s view that due to the limited penetration of traditional banking services across Africa, there are a substantial number of unbanked customers whose needs can be met largely through mobile money services, implying a positive outlook for Airtel mobile money.

Airtel incurred CAPEX of US$312m in H1 2024. The company noted that its CAPEX expenditure is still in line with its CAPEX guidance for the full year which is between US$800m and US$825m. The management noted that 89% of its capex investment is geared towards growth initiatives such as increasing its data capacity, coverage expansion, and strengthening its IT infrastructure. The company continues to invest heavily in expanding its network infrastructure and data coverage in order to retain existing consumers.

Direct Network Operating Costs grew by 0.4% US$491m from US$489m in H1 2023. Given rising inflationary pressures, we expect Direct Operating Costs to remain pressured, and we forecast a 27% y/y rise in Network cost in 2024e. Operating Expenses rose by 2.3% y/y to US$846m in H1 2024 from US$827m in H1 2023. The growth in Opex reflects the impact of the Naira devaluation, elevated inflation and unavailability of FX leading to increased costs of in its network expansion program. Despite the growth in Opex, EBITDA increased by 3.7% y/y to US$1.3m in H1 2024 from US$1.25m in H1 2023. In addition, EBITDA margin increased, by 71bps y/y to 49.6% in H1 2024.

Operating Profit grew by 1.5% y/y to US$885m in H1 2024 from US$872m in H1 2023, despite an 8.9% increase in Depreciation and amortization to US$417m in H1 2024. We note that the company has taken a couple of cost-efficiency initiatives to mitigate several macroeconomic headwinds. This includes working with tower companies (Towerco’s) to invest more in energy-efficient equipment (including lithium batteries and solar equipment), enhancing grid connectivity, transmission re-routing to optimize lease line capacity, and shifting towards digital recharges, especially through Airtel money to reduce commission pay-outs. We note however that despite the company’s cost-cutting attempts, we expect EBITDA margins to continue to be impacted by the additional VAT on tower leases, the high inflationary environment, and rising energy costs. In line with our projections of an increase in revenues, we project EBITDA margin to increase marginally to 50% in 2024e from 49% in 2023.

Net Finance Cost increased, up 144.1% y/y to US$873m in H1 2024 from US$358m in H1 2023. The elevated Net Finance Cost mirrors the 141.2% y/y increase in Finance Cost despite a 54.5% y/y rise in Finance Income. The increase in Finance Income was driven by the company’s exposure to the foreign exchange devaluation in June 2023. We also note that higher interest on market debt, mostly from spectrum acquisitions and license renewal payments made in the previous year, as well as higher interest on lease liabilities, contributed to the increase in net finance expenses.

Overall, Pre-tax Profit decreased by 97.7% y/y to US$12m in H1 2024 from US$330m in H1 2022. The company recorded a loss position of US$13m in H1 2024 and EPS declined to US$0.01 in H1 2024. We note that Airtel Networks Limited (‘Airtel Nigeria’), has made a payment of NGN58.7bn (US$127.4m), payable to the Nigerian Communications Commission (NCC), to renew its 2x10MHz 2100 MHz spectrum licence, which will be valid for a period of 15 years following the expiry of the previous licence in April 2022. This investment underscores the company’s ongoing commitment to seizing opportunities in the Nigerian market, enabling rural coverage and capacity growth while increasing digital inclusion and connection. We expect the company’s profit to decline in 2024e due to rising Net finance costs, we believe the company’s PBT will decline to US$924m in 2024e from the US$1034m in 2023.

Valuation

We maintain our price target of N1466.4/s with a SELL recommendation. Our target price implies a downside potential of 18.1% from the last closing price of N1790/s on 06 November 2023. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation assigning a weighting of 60:40.

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