Airtel Africa has growth on speed dial. Here's how to play it
Mobile-phone group Airtel Africa is cashing in on the rise of the continent's digital economy and looks set for years of rapid expansion, says Matthew Partridge.
One of the key secular trends in the global economy is the rise of Africa. Thanks to favourable demographics, economic reforms and strong commodity prices, the continent is set to grow strongly over the next few years.
While African GDP fell last year, the decline was only 2%, much smaller than the fall in developed countries, and the region is expect to produce solid growth of around 3%-4% this year.
One interesting way to take advantage of Africa’s boom is through the FTSE-250 company Airtel Africa (LSE: AAF), which offers an unbeatable combination of value and growth.
Airtel Africa provides mobile services to around 118 million customers in 14 countries, mainly in east, central and west Africa, including Kenya, Uganda and Nigeria. At present most customers use it to make simple, prepaid voice calls. However, around a third of customers also use Airtel to browse the internet on their phones, with the total amount of data consumed growing by 40%-50% a year over the past few years.
Airtel is investing in rolling out faster 4G-network services to meet this growing demand and developing pricing structures that encourage its consumers to upgrade their plans.
Show me the money
However, by far the most interesting part of Airtel’s business is its provision of mobile banking and money-transfer services through its ownership of a majority stake in Airtel Money. Because the traditional banking infrastructure in Africa is particularly limited, many people are forced to use mobile services to move money around.
In addition to money transfers, both within and between countries, Airtel Money offers savings accounts and even some loans.
While it has only 20 million customers so far, it is growing its customer base at a rate of 30% a year, which is why larger companies are eager to invest in it. Mastercard has bought a small stake in the subsidiary, which will allow Airtel to invest more money in expansion.
Airtel’s overall revenue has grown by around 8% a year between 2017 and 2021 and is expected to keep expanding at a similar, or slightly higher, rate in the next few years.
Strong operating margins and a high return on capital expenditure (a key gauge of profitability) of 15% explain why it made its first profit in 2019 and managed to start paying a dividend last year, when other companies were suspending theirs. Even though Airtel’s share price has tripled since March 2020 and is substantially above its pre-crisis peak, it is still selling for a very low 11 times 2022 earnings, with a dividend yield of 4%.
Airtel’s share price is very close to its 52-week high and above its 50-day and 200-day moving averages, so it seems to have strong momentum behind it. I suggest that you immediately go long at the current price of 98p a share at £40 per 1p. With a stop-loss of 74p, this gives you a maximum total downside of £960.