E.3 Airtel Africa - Driving Connectivity in the African Ecosystem

In the face of challenging macroeconomic conditions, Airtel Africa demonstrated its resilience by achieving a 69 basis point increase in its EBITDA margin to 49.5% in the quarter ended June 2023 from 48.8% in the same quarter last year. With a five-year revenue average growth of 23.5%, the telecommunications behemoth has positioned itself as a focal point in the penetration of mobile data and mobile money services across the relatively under-connected African landscape.

Business Overview

Airtel Africa is a subsidiary of Bharti Airtel Limited, an Indian multinational telecommunications company committed to building an extensive network infrastructure that supports seamless connectivity. Founded in 2010 through its acquisition of African telecoms provider Zain, Airtel Africa operates in 14 sub-Saharan African countries.

???????????Airtel Africa Plc. Geographical Presence

In 2019, Airtel Africa was dual-listed on the Nigerian Exchange Group (NGX) and the London Stock Exchange (LSE) and has posted a 248.65% five-year return on the NGX. Revenues from mobile services in Nigeria alone account for approximately 38% of Airtel Africa’s total revenues, making Nigeria one of the company's primary focal points.?

Airtel Africa 5-year Performance

Aligned with its parent company’s three-tiered business model encompassing digital infrastructure, digital experience, and digital services, Airtel Africa has a comprehensive growth strategy named “Win with.” This strategy revolves around six key pillars: network, distribution, data, mobile money, cost, and people. These pillars are the factors that drive acceleration in voice, data, and mobile money revenue growth, according to the CEO, Olusegun Ogunsanya.

Industry Dynamics & Competitive Advantage??

Mobile phone usage is experiencing rapid expansion in Africa, outpacing growth rates in other regions and propelling the telecommunications industry forward. Despite ranking as the third-largest telecom provider on the continent by subscriber base, Airtel Africa distinguished itself in Q2’23 by achieving the highest subscriber growth among the top four players.

As a dominant player in the industry, Airtel Africa has successfully established economic moats that bolster and enhance its profitability margins. These moats encompass several vital factors, including strong brand recognition, a substantial and continually expanding subscriber base, notable technological innovations such as the SmartCash payment service bank, and infrastructure development initiatives enabling its expansion into previously underserved areas. In its year-end report for March 2023, Airtel Africa announced that its rural population coverage had reached an impressive 70%, further solidifying its market position.

Porter’s Five Forces Model Analysis for Airtel Africa:

1. Threat of new entrants: The telecommunications industry in leading African countries is relatively mature and characterized by substantial barriers to entry. These barriers encompass the need for significant infrastructure investments, access to spectrum, regulatory hurdles, and establishing a brand presence. Airtel Africa, an established player with an extensive network, holds a distinct advantage against potential new entrants.

2. Threat of substitute products or services: While there are alternative forms of communication, such as internet-based communication apps, mobile telephones remain the dominant and preferred means of communication across the continent. The entrenched usage of mobile phones in Africa minimizes the immediate threat of substitute products or services to Airtel Africa’s core mobile telephony business.

3. Bargaining power of suppliers: Airtel Africa relies on suppliers for equipment and infrastructure, but as one of the largest telecommunications companies in the region, it likely has significant bargaining power in negotiations with suppliers.

4. Bargaining power of buyers: Given its large and growing population, the African telecommunications market is expansive and diverse, providing buyers with a wide range of options and, consequently, significant bargaining power.

5. Competitive rivalry among existing firms: The telecommunications industry in Africa is highly competitive, with multiple players vying for market share. Airtel Africa competes with significant players in the African telecom market, including MTN Group, Vodacom Group, Orange Africa & Middle East, and various smaller regional operators. This competitive environment necessitates ongoing investment in network quality, customer service, and innovative offerings to maintain and expand its market position.

Financial Health??

Airtel Africa has demonstrated remarkable financial resilience despite significant challenges, such as the substantial currency devaluation in its primary market, Nigeria. This devaluation led to a foreign exchange loss of $471 million and a revaluation of the company’s USD-denominated balance sheet liabilities, resulting in an increase in the debt-to-equity ratio to 1.43x in June 2023, up from 1.18x in the same quarter of the previous year.

However, it's essential to note that the company's financial health remains robust, and several crucial indicators reflect this:

Leverage Ratio (Debt-to-EBITDA): The leverage ratio, which assesses how many times a company's EBITDA can cover its net debt, remained steady at 1.3x during the same period. This stability primarily results from the company's strong earnings growth, which offsets the impact of the currency devaluation.

Liquidity Ratios (Quick and Current Ratios): Airtel Africa's quick ratio (0.64) and current ratio (0.65) remained stable throughout the year. These ratios indicate that the company is not facing an increased burden in meeting its short-term financial obligations, reassuring stakeholders about its liquidity position. However, Airtel Africa’s quick and current ratios are lower than the industry average of 0.76 and 0.78, respectively.?

Capital Expenditure (CAPEX): Despite the challenges faced during the operating period, Airtel Africa remained steadfast in its commitment to capital expenditure. In the quarter ended in June 2023, the company maintained a CAPEX of $140 million, mirroring the CAPEX investment of the previous year. This disciplined approach to capital spending demonstrates Airtel Africa's dedication to sustaining and enhancing its infrastructure and operations.

Operating Free Cash Flow: Operating free cash flow (FCF) showed impressive growth, increasing by 14.63% to $542 million in the quarter ending June 2023. This positive trend reflects the company's ability to generate cash through its operations. Airtel Africa’s operating FCF has grown at an average of 27.5% in the last five years as of the fiscal year ended March 2023.

While the above indicators suggest a sound financial health outlook, it's crucial to recognize the heightened risks posed by foreign exchange losses, especially in markets with currency volatility, such as Nigeria, where these fluctuations can have a significant impact. Airtel Africa anticipates its leverage ratio to rise to 1.4x or 1.5x after factoring in the full effects of Nigeria's currency devaluation. Therefore, proactive currency risk management strategies will be crucial for Airtel Africa to maintain its financial stability and growth trajectory.

Growth Trajectory & Profitability Assessment ??

Airtel Africa has demonstrated a consistent upward trajectory in its gross and EBITDA margins, reflecting its ability to generate revenue effectively. In the quarter ending June 2023, the company reported robust revenue growth of 20.4% in constant currency and 9.6% in reported currency, reaching $1.38 billion. Several pivotal factors underpinned this growth, including the expanded reach of the firm's 4G services, the rollout of 5G services, and the increasing adoption of digital-based services and innovations. Notably, Airtel Africa's diversified service offerings have contributed to its revenue base diversification, with all segments experiencing rapid growth.

The EBITDA also exhibited strong growth, surging by 22.5% in constant currency and 11.1% in reported currency to $682 million. This growth reflects Airtel Africa's proficiency in managing costs effectively, even amid inflationary pressures.?

However, it's essential to address the company's bottom-line performance, which experienced a loss, declining by 184.7% to -$151 million in the quarter ending June 2023. This substantial loss primarily resulted from the devaluation of the Nigerian naira in June 2023, classified as a non-operating exceptional item.

Key Points to Consider:

EPS (Earnings Per Share) Before Exceptional Items: Airtel Africa reported EPS before exceptional items of 3.9 cents, reflecting a 3.3% improvement and suggesting the company's underlying profitability remained positive without the currency devaluation impact.

Basic EPS: The basic EPS, which includes the effects of the currency devaluation, was negative at -4.5 cents, marking a 204% decline from 4.4 cents in the same period the previous year. The significant negative impact on basic EPS underscores the exchange rate's instability in Airtel Africa's primary market, posing a considerable risk to the company's bottom line and net margin.

Revenue Breakdown

Airtel Africa categorizes its revenue into mobile services, which include voice, data, and other services, as well as mobile money. As of June 2023, voice services stood out as the top revenue contributor, generating $621 million, followed by data services at $486 million, mobile money at $201 million, and other services at $114 million.

Regarding revenue growth, mobile money experienced the highest year-on-year growth rate at 26.4%. This robust growth stems from an expanding customer base and increased transaction value per customer within the mobile money segment. Data services also saw significant expansion, with an uptick of 16.3%, driven by an expanding customer base and investments in 4G network expansion and infrastructure. On the other hand, other services and voice services, although contributing significantly to revenue, displayed growth rates of 7.5% and 1.8%, respectively. The relatively lower growth in voice services could be due to market saturation and evolving communication preferences.

In terms of geographical revenue, Nigeria alone accounted for 38.3% of Airtel Africa’s revenue in the quarter ended June 2023 at $528 million, while East African countries where the company has a presence all together contributed 37.7% to the firm's total revenue at $519 million. Meanwhile, Francophone Africa accounted for 24% of total revenues at $330 million. This geographical distribution highlights the company's diverse market presence while emphasizing its substantial exposure to the Nigerian market.

Management ??

CEO - Segun Ogunsanya:

Segun Ogunsanya became Airtel Africa's CEO in 2021, bringing a wealth of experience. He held various leadership roles in diverse sectors, including banking, consumer goods, and telecommunications, accumulating over 25 years of business management expertise. Notable positions in his career include heading operations at Airtel Nigeria and leadership roles at Coca-Cola Ghana and Kenya, Ecobank Transnational Inc. and Nigerian Bottling Company Plc. Mr. Ogunsanya's appointment as CEO showcases his strong leadership and understanding of Airtel Africa's primary market, Nigeria, where he previously served as the head.

Remuneration Comparison:

According to the company's full-year 2021/22 report, Mr. Segun Ogunsanya received a total remuneration of $1,404,000 (N577 million). When comparing CEO salaries within the industry, Mr. Karl Toriola, CEO of MTN Nigeria, had a remuneration sum of $1,896,155 (N850 million) in 2022 while the CEO of Safaricom, Mr. Peter Ndegwa earned a total remuneration of $2,528,290 (N1135 million). This comparison indicates that Mr. Ogunsanya's compensation is in line with industry standards, and it does not appear to be excessive, aligning with good management practices.

Airtel Africa’s Impact on the African Ecosystem

Airtel Africa has emerged as a transformative force in the African economy, ushering in a new era of connectivity and digital empowerment. Through its rapid expansion across 14 African countries, the telecommunications giant has propelled the continent into the digital age. By offering affordable and accessible telecommunications services, Airtel Africa is bridging the digital divide that has long hindered Africa's progress. This push for digital transformation has far-reaching effects, enhancing education, healthcare, and economic opportunities across Africa.

One of Airtel Africa's most notable contributions is in the realm of financial inclusion. Its mobile money service, Airtel Money, has become a lifeline for those previously excluded from the formal banking sector. In a region where traditional banking services are often out of reach for many, Airtel Money provides a pathway to financial security and economic participation. By enabling transactions, savings, and access to credit, Airtel Money is not just changing lives—it's fueling economic growth across sub-Saharan Africa.

Airtel Africa's commitment to infrastructure development is equally impressive. Its extensive investment in cellphone towers and plans to allocate substantial capital to expand its mobile money business demonstrate its dedication to enhancing Africa's connectivity and financial services infrastructure. These efforts, in turn, stimulate economic growth by creating jobs and improving communication networks. Airtel Africa's multifaceted impact on the African economy is a testament to its role as a catalyst for positive change, digital inclusion, and economic advancement across the continent.

Disclaimer: This article is meant for informational purposes only and is not a recommendation to buy, sell, or hold a position in this stock. Migasuto Global Services will not be held liable for any investment decision taken based on the information provided in this newsletter.