March 8, 2024/CSL Research

Airtel Africa’s topline performance was impacted by a decline in voice revenues (down 8.8% to US$1.7bn) despite increases in mobile revenue (up 22.4% y/y to US$631m) and data revenue (+1.9% y/y to US$1.34bn). The company’s bottom line performance was significantly impacted by FX losses, which resulted in a spike in the company’s Net Finance Cost (+138.54% y/y to US$1.24bn) causing Profit before Tax to decline by 93.1% y/y to US$55m in 9M 2024 from US$801m in 9M 2023.

Airtel Africa’s 9M 2024 numbers were largely impacted by significant currency devaluations in many of its countries of operation. Currencies that depreciated include the Nigerian Naira (64.7%), the Zambian kwacha (22.7%), the Malawi kwacha (21.5%), and the Kenyan shilling (21.1%). The company noted that the Nigerian Naira devaluation reduced Revenue by US$579m during the nine-month period ended 31 December 2023.

Despite the impact of devaluation on Airtel’s numbers we maintain our long-term view that given the significant investments made by the firm in improving its network infrastructure and expanding its data coverage, there should be significant improvement in the quality of the company’s services, making us believe Airtel Africa is well-positioned to benefit from further growth in mobile money and data penetration in Africa’s telecommunications industry.

That said, we believe the further devaluation of Nigeria’s currency in 2024 (down 43.38% ytd), will have significant impact on both the company’s topline and bottom line, thus we forecast the company will close FY 2024 in a loss position of US$43m compared with a profit position of US$5,225m for FY2023. A higher conversion rate from USD to Naira has necessitated an increase in our target price to N1,953.4 from N1466.4/s previously, implying an 11% downside from the last closing price of N2,200/s on 08 March 2024. We maintain a Sell recommendation on the stock. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation assigning a weighting of 60:40.

Airtel Africa’s 9M 2024 financials showed a decline in Revenue by 1.4% to US$3.86bn from US$3.91bn in 9M 2023. On a q/q basis, Total Revenue declined by 0.6% to US$1.24bn in Q3 2024 from US$1.25bn in Q2 2024. The company attributed the decline in Revenue to the impact of currency devaluations in the period. The company noted that the Naira devaluation reduced Revenue by US$579m during the nine months ended 31 December 2023. Further analysis of the company’s financials revealed that revenue from the company’s Nigerian operations declined by 21.9% to US$1,237m in 9M 2023 from US$1,585m on account of the 64.7% average devaluation of the Naira. Revenues from the East Africa region grew by 8.7% to US$1,227m in 9M 2024 from US$ 1,129m in 9M 2023. We note that the growth rate in the region was impacted by the average devaluation in Zambian kwacha (22.7%), Malawi kwacha (21.5%) and Kenya shilling (21.1%). Revenues from the Francophone region grew by 13.0% by US$912m in 9M 2024 from Us$807m in 9M 2023.

Despite the impact of currency devaluations on the company’s numbers, the company’s Data Revenue remained resilient in 9M 2024, increasing by 1.9% y/y to US$1.34bn from US$1.32bn in 9M 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 reported that its total customer base grew by 9.1% to 151.2 million y/y, as mobile data and mobile money services penetration continued to rise. Data customers increased by 22.4% y/y to 62.7 million.

The management maintained its 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. The company noted that in its Nigerian operation, 4G network rollout has resulted in nearly 100% of its tower sites delivering 4G services. Furthermore, it noted that 235 of its 5G sites are now operational.

As at 9M 2023 the company noted that its 4G customers accounted for 52.1% of its total data customer base and contributed 86.2% of total data usage. 4G data usage per customer reached 12.8 GB per month as of 9M 2024, an increase of 42.0% (from 9.0 GB per customer per month in 9M 2023). We have revised our data revenue forecasts, which now estimates a 4% y/y growth in 2024e from our initial 24% forecast due to the impact of the currencies devaluation’s on the company’s revenues . We also estimate that the contribution of data Revenue to total Revenue will average around 45% in 2024e.

As expected, voice revenue declined by 8.8% y/y to US$1.7bn in 9M 2024 from US$1.87bn in 9M 2023. Despite the drop, the company reported that its total customer base grew by 9.1% to 151.2 million y/y. We believe the growing digital consciousness contributed to the decline in voice revenue. We expect voice Revenue to continue to decline; hence, we estimate a 15% decline 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.

We note a significant improvement in mobile money Revenue, up by 22.4% in 9M 2024 to US$631m from US$515m in 9M 2024. Mobile money customers grew by 19.5% y/y to 37.5 million. The growth in mobile money revenue was driven by mobile money revenue growth in both East Africa and Francophone Africa, (up 22% and 24% respectively). The company noted that the expansion of its distribution network, particularly its exclusive channels of Airtel Money branches and kiosks, has continued to support its customer base growth.

That said, given the steep devaluation already witnessed in Nigeria in 2024 (42.69% ytd), we expect that the company’s Revenue to be negatively impacted and we estimate a decline of 7% to US$4,900m in 2024 from US$5,225m in 2023.

Direct Network Operating Costs declined by 5.7% to US$716m from US$759m in 9M 2023. Operating Expenses increased by 0.6% y/y to US$1.26m in 9M 2024 from US$1.25m in 9M 2023. Despite the increase in costs, the company’s EBITDA decreased by 0.4% y/y to US$1.91bn in 9M 2024 from US$1.92bn in 9M 2023. In addition, EBITDA margin also decreased by 49bps y/y to 49.4% in 9M 2024. Operating Profit declined by 1.9% y/y to US$1.29bn in 9M 2024 from US$1.32bn in 9M 2023 amidst a moderate 2.8% increase in Depreciation and amortization to US$615m in 9M 2024. We note that the impact of the currency devaluation and the elevated inflationary environment has impacted the company’s EBITDA margins, Thus, In line with our projections of a decrease in Revenue, we project EBITDA margin to decrease marginally to 47% in 2024e from 49% in 2023.

Net Finance Cost increased, up 138.54% y/y to US$1.24bn in 9M 2024 from US$519m in 9M 2023. The elevated Net Finance Cost mirrors the 133.4% y/y increase in Finance Cost amidst a 17.4% y/y rise in Finance Income. The company management noted that its Net Finance Cost in 9M 2024 was largely impacted by US$748m of derivatives and foreign exchange losses because of the currency devaluations especially the Naira devaluation. They noted that a significant portion of this devaluation occurred in June 2023 following the Central Bank of Nigeria’s (CBN) announcement of changes to the operations in the Nigerian Foreign Exchange (FX) market, leading to a US$447m loss. The continued devaluation of the Naira post-June resulted in further losses of US$214m in Q3 2024. Given the further devaluation of the Naira, we project an increase in Net finance cost by 96.29% to US$1,419m in FY 2024 from US$723m in FY 2023.

Overall, Pre-tax Profit decreased by 93.1% y/y to US$55m in 9M 2024 from US$801m in 9M 2023. Tax Expense declined by 80.9% in 9M 2023 to US$53m from US$278M in 9M 2023. Net Income declined by 99.6% y/y to N2m in 9M 2024 from US$523m in 9M 2023. Basic EPS was negative (1.6 cents) compared with 12.5 cents in the prior period. Given the impact of the currency devaluation on the company’s topline and bottom line, we forecast the company will close FY2024 in a loss position of US$43m compared with US$5,225m in FY 2023.

The company has stated its intention to launch a share buy-back programme. Under this programme, which is expected to start in early March 2024, the company plans to purchase up to US$100m worth of shares over a 12-month period. The programme is expected to be executed using its cash reserves and by applicable securities laws and regulations. We may not observe an uptick in share price in Nigeria as is generally associated with share buybacks because the share buyback will be carried out on the London stock exchange.

In December 2023, the Nigerian Communications Commission (NCC) issued an industry-wide directive, to undertake full network barring of all SIMs that have failed to submit their National Identity Numbers (NIN) on or before 28 February 2024. This directive is part of the ongoing Federal Government NIN-SIM harmonisation exercise requiring all subscribers to provide valid NIN information to update SIM registration records. The company noted that it does not have a significant number of customers generating material revenues that have yet to submit their NINs for verification. It noted that approximately 9.2m customers are currently going through the process of NIN verification. Since the directive was issued in December 2023, the company noted that 4.5m customers have already been verified.

Given Airtel’s clarification on the matter, we believe that the directive will not have a material impact on the company’s revenue in the short term.

Valuation

We have revised our target price to N1,953.4 from N1466.4/s previously largely due to a higher conversion rate from USD to Naira. Our target price implies an 11% downside from the last closing price of N2,200/s on 08 March 2024. We maintain a SELL recommendation. We arrived at our target price using a Discounted Cash Flow (DCF) and Relative valuation methods assigning a weighting of 60:40.

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