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Airtel Africa’s Q1 22 earnings in line as valuation premium widens

Airtel Africa (AIRTELAFRI) released its Q1 22 unaudited results before the market opened 28 July (note: March year-end). The group reported EPS of US$0.04 (+30.4% y/y) in Q1 22, underpinned by strong revenue growth and decreased tax charges.

The achieved EPS, when annualised, was in line with our estimate (-2.1% variance) for FY 23 but was 3.6% lower than the consensus estimate.

The market’s reaction was neutral as the stock was flat today. Year-to-date, the stock is up by 99.5%. However, on the London Stock Exchange today, the parallel-listed Airtel Africa stock fell by 8.0% in reaction to the results as analysts reacted to the earnings miss and erosion of EBTIDA margins in Nigeria.

Revenue growth slowed to eight-quarter low

Revenue grew by double-digits for the eighth successive quarter in Q1 23. However, the pace of growth slowed to 13.0%, an eight-quarter low. According to management, the slowdown was attributable to the effect of  voice customers barred in Nigeria and the loss of tower sharing revenues following the recent sales of towers in Tanzania, Madagascar and Malawi. Nonetheless, the growth was primarily driven by growth in Data (+17.4% y/y) and Voice (+8.5% y/y).

Growth in Data, which contributed 33.3% (Q1 22: 32.0%) to revenue, was delivered through a combination of Data customer base growth (+9.7% y/y) and Data Average Revenue Per User (ARPU) growth (+5.0% y/y). According to management, the expansion of AIRTELAFRI’s 4G network infrastructure helped drive the customer base growth, and 88.4% of the Group’s sites are now operating on 4G, compared with 79.4% in the prior year. In addition, 4G customers made up 44.1% of the total Data customer base.

Total customer base growth (+8.9% y/y) and Voice ARPU growth (+1.8% y/y), following the continued expansion of the Group’s network and distribution infrastructure, supported voice revenue (+8.5% y/y) which accounted for 48.5% of total revenue in Q1 23.

Elsewhere, Mobile money revenue (+28.2% y/y) continued to grow by double-digits, following the continued expansion of the Group’s distribution network, particularly the expansion of the exclusive channel of Airtel money branches and kiosks. However, although growth in the segment remains strong, we note that mobile money revenue growth has slowed in recent quarters (Q2 22: +35.0%; Q3 22: +33.6%; Q4 22: +33.6%). According to management, this was due to the implementation of additional levies by the Government of Tanzania on mobile money withdrawals and P2P transactions from July 2021, which have subsequently been revised on several occasions. Ex-Tanzania, mobile money revenue grew by 34.2%.

During the quarter, total expenses (ex-depreciation) grew by 11.0% y/y, as inflation negatively impacted the company’s cost base, particularly energy costs. Nevertheless, EBITDA grew by 15.0% y/y, with the EBITDA margin expanding slightly to 48.8% (vs 47.3% in Q4 22 and 48.0% in Q1 22).

Lower tax rate underpins higher profits

Net finance costs (+55.7% y/y) rose in Q1 23 due to a US$51m increase in  foreign exchange and derivative losses and a US$6m increase in interest on lease obligations. Overall, Q1 PBT grew 6.6% y/y. The total tax charge declined by 16.2% year-on-year due to the initial recognition of a deferred tax credit of US$21m in Kenya.  As a result, Net profits grew 30.4 % y/y.

Conference call highlights

Cash upstreaming

Airtel Nigeria repatriated US$150m-US$160m in Q1 23 at an undisclosed exchange rate. The average exchange rate of the transaction was somewhere between the official exchange rate and the parallel market exchange rate.

Nigeria margin contraction

The EBITDA margin in Nigeria fell by 424bps to 51.0%. The contraction was primarily due to the rise in local diesel prices.

The company models a 10% devaluation in the Naira to have a 1% impact on its EBITDA margin

AIRTELAFRI is trying to mitigate diesel cost pressures by moving from diesel to battery and solar power. It is also implementing cost-sharing agreements with tower companies (towercos).

Management is renegotiating how much of the fuel price increases are passed on by the towercos by guaranteeing new sites and actively encouraging conversion of new sites to solar and battery power.

National Identitification Number (NIN) – SIM linkage impact in Nigeria

Airtel Nigeria barred (voice calls only) 13.6m subscribers in April 2022. Since then, 5.3m of those subscribers have submitted their NINs (8.3m did not submit), and services have been reinstated to 2.3m subscribers.

There has been some SIM consolidation – customers who had multiple SIMs have shifted usage to one primary SIM.

AIRTELAFRI recorded an increase in ARPU from customers who transferred usage to Airtel.

37m-38m customers can make calls but all customers (46m) can access data and SMS services.

Slowdown in data revenue growth

AIRTELAFRI Q1 23 data revenue grew by 17.4% y/y, much slower than in Q4 22 (26.3%). According to management, this was due to higher churn due to NIN-related call barring in Nigeria. In addition, there was a downard adjustment in data prices in the Francophone Africa region to make data services more affordable, while in East Africa, data prices were reduced in response to competititive pressures.

High end data users showed increased usage — 4G data usage per customer grew from 6.5GB in Q4 22 to 7.5GB in Q1 23.

Customers lost due to NIN are at the lower end of the market. However, smartphone penetration has increased across the board.

Nigeria PSB

Smartcash had a soft launch in May and a full launch in June. Management did not give any KPIs on the business as it is still early days.

Conclusion

AIRTELAFRI’s operational performance in Q1 23 was strong and in line with our expectations. We expect that continued network and infrastructure expansion will see the Group deliver substantial revenue and earnings growth over the rest of FY 23. The investment case for the company remains the same – the company is well-positioned to capture increasing mobile and internet adoption across Africa’s largely underpenetrated market – and we think this has already been priced-in.

However, on the NGX Exchange in Nigeria, the stock continues to trade at valuations that we find unjustifiably rich. Moreover, it has become more expensive since our last note. On our estimates, the stock is trading on forward P/E and EV/EBITDA multiples of 25.0x and 8.3x, a rich premium to emerging market peer multiples of 13.7x and 5.6x. Furthermore, in London, it trades at a Forward P/E of 10.8x.

Experts at Cordros Capital think the primary reasons for the mispricing are majorly around Nigeria’s FX liquidity conundrum and the stock’s low liquidity compared with its market capitalisation.  In our view, a much-improved FX liquidity could take the steam out of the rally. Accordingly, we maintain our SELL recommendation on the stock.