Airtel Africa

Theme and Background

This chapter examines the investment value of Airtel Africa, arguing that the market significantly undervalues the company. The company operates telecom businesses in sub-Saharan Africa, a market characterized by low mobile and data service penetration and rapid population growth.

Core Thesis

The report’s central thesis is that Airtel Africa is a high-growth, high-profitability telecom company with extremely low valuation, and the market suffers from a severe “lazy categorization bias,” incorrectly lumping it together with slow-growth mature-market telecom operators. A counterintuitive judgment is that despite currency depreciation risks in emerging markets, the company can sustain growth in U.S. dollar terms.

Key Arguments and Data

1. Low Valuation and Historical High Growth:

• Market capitalization of approximately $5.5 billion, P/E ratio below 9x, EV/EBIT multiple of only 6x.
• Since 2017, revenue has grown from $2.8 billion to $4.6 billion, an increase of about two-thirds; EBITDA has risen from approximately $0.7 billion to $2.1 billion, more than doubling.

2. Market Bias and Incorrect Analogies:

• Lazy Categorization Bias: The market treats it as a low-growth, high-capital-expenditure traditional telecom company, but its growth and return on capital are far superior to mature Western telecom peers.
• Familiarity Bias: The company operates across 14 African countries, but is listed in London, reports in U.S. dollars, and is controlled by an Indian operator, lacking a natural investor base, which persistently depresses its valuation relative to locally listed peers.
• Availability Bias: The market overlooks the value of its mobile money business.

3. Strong Business Fundamentals:

• Telecom Business:
• Market Potential: Mobile penetration in its operating regions is only 54% (near 100% in Europe and the U.S.), and population continues to grow (Africa grew 2% in 2022 vs. 0% in Europe).
• Subscribers and Usage: Subscriber base has grown from 40 million at acquisition to 135 million currently; average voice minutes per line per month have increased to 270 minutes.
• Data Explosion: Data traffic grew 45% in the first half of FY2023, but only 45% of subscribers use 4G; average subscriber downloads only 4.5GB per month, less than half the level in Europe.
• Inflation-Hedging Model: By keeping the price per GB of data stable (rather than continuously declining as in mature markets), the company effectively hedges against local currency depreciation and inflation, allowing its U.S. dollar-denominated ARPU to remain roughly stable.
• Profitability: EBITDA margin exceeds 40%, EBIT margin exceeds 30%, roughly double that of leading U.S. operator T-Mobile.
• Mobile Money Business (Hidden Gem):
• Market Scale: Will facilitate over $100 billion in transactions this year.
• Financial Contribution: Generates approximately $600–700 million in revenue and over $300 million in EBITDA for Airtel Africa.
• Growth Trend: Subscribers, transaction value, revenue, and EBITDA have grown nearly every quarter since Q1 2019.

4. Valuation Comparison with Peers:

The report notes that Airtel Africa’s valuation has consistently been lower than slower-growing peers such as Safaricom and MTN.

Companies/Assets Involved

• Airtel Africa: The core asset the report is bullish on. A telecom operator in sub-Saharan Africa, with majority shareholder Bharti Airtel (55% stake). Key data: market cap ~$5.5 billion, 135 million subscribers, FY2023 mobile money EBITDA ~$350 million.
• Bharti Airtel: Indian telecom giant, controlling shareholder of Airtel Africa, known for its low-cost operating model.
• Safaricom: Airtel’s competitor in Africa (primarily East Africa), famous for its mobile money service M-PESA. Referenced in the report for valuation comparison (Airtel trades at a lower valuation).
• MTN Group: Another major telecom operator in Africa, referenced for valuation comparison (Airtel trades at a lower valuation).
• T-Mobile US: U.S. telecom operator, used in the report to compare EBIT margins (Airtel’s is roughly double).

Investment Implications

For investors willing to accept currency and geopolitical risks in African markets, the current extremely low valuation (single-digit P/E) offers an attractive risk-reward proposition. The investment thesis is based on: 1) Continued subscriber and usage growth in the core telecom business within a low-penetration market; 2) Effective hedging of inflation and currency risk through data pricing model; and 3) The significant additional value and growth engine from the mobile money business, which the market severely undervalues.

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Theme and Background

This chapter provides an in-depth analysis of the growth prospects and valuation of Airtel Africa’s mobile money business in the Nigerian market, while also examining the operating conditions, regulatory environment, and currency risk in Nigeria, which is a key market for the company.

Core Thesis

The author believes that Airtel Africa’s mobile money business is significantly undervalued by the public markets, and its standalone valuation should far exceed the current market valuation of Airtel as a whole. Meanwhile, despite the unique regulatory and currency challenges in Nigeria, Airtel’s core telecom business in the country continues to generate strong cash flows with substantial growth potential, making the company’s stock appear very cheap even under the most conservative valuation assumptions.

Key Arguments and Data

1. Mobile Money Business Valuation

• In early 2021, management sold a minority stake in this business to a US private equity firm and Mastercard at a valuation of USD 2.65 billion.
• The author forecasts that by 2027, the mobile money business will generate USD 1.5 billion in revenue and USD 750 million in EBITDA.
• If the business were listed independently, the author believes its valuation would exceed USD 5 billion, equivalent to 14x trailing EBITDA or approximately 6.6x the forecast 2027 EBITDA.

2. Nigerian Telecom Business Growth Potential

• Subscriber base: Airtel Nigeria has 47 million customers, holding the second-largest market share. Customer numbers grew 9% year-on-year in the most recent quarter.
• Data service penetration: Only 23.8 million customers (50% of total subscribers) have activated data services, and this proportion is expected to trend toward 100% over the next decade.
• Data usage: Data usage per customer in the last quarter increased 25% year-on-year.
• Cash flow: Considering annual capex of USD 200-300 million, EBITDA minus capex for the Nigerian business is approximately USD 700-800 million, generating substantial free cash flow.

3. Regulatory and Currency Risk Analysis

• Taxation: Nigeria’s corporate tax rate in 2022 was 30% (global average 23.5%). Airtel Africa’s weighted statutory tax rate is around 33%, and the actual tax rate paid, including withholding tax on dividends, is approximately 40%.
• Spectrum: Airtel acquired the rights to 100 MHz of 5G spectrum for USD 317 million. The author considers this price reasonable given the potential hundreds of millions of dollars in EBITDA that 5G services could generate.
• Currency:
• The Naira-to-USD exchange rate has depreciated from 22:1 in 1994 to over 400:1 in 2023, an average annual depreciation of about 11%.
• There is a large gap between the official exchange rate and the parallel market rate, with the parallel market rate currently exceeding 700 Naira to 1 USD.
• At the parallel market rate, the USD-denominated growth of the Nigerian business nearly disappears. However, the company has mostly been able to repatriate USD at the “official” rate; for example, in the nine months before Q3 2022, it remitted USD 300 million, representing most of its free cash flow over that period.
• Mobile Money Regulation: Nigerian regulations prohibit the “telco-led model”, and mobile money can only be operated by a “principal initiator” holding a specific license. This restricts the model under which Airtel can conduct mobile money business in the country.

4. Nigerian Mobile Money Opportunity

• If Airtel can achieve 20% mobile money penetration among its telecom subscribers (well below the 40%+ target in other regions), it could generate USD 100-150 million in revenue for the company.
• Assuming a 50% EBITDA margin and no significant capex, this would significantly increase the company’s free cash flow.

5. Scenario Forecast Basis

• In all forecast scenarios, the author assumes that telecom subscribers will grow from 140 million to 170 million over the next four years (41 million subscribers were added in the past four years).
• For the Nigerian business, all scenarios use the parallel market exchange rate.
• The key variable is telecom ARPU (average revenue per user). The author expects that the USD price per GB may decline due to local currency inflation and pricing pressure from industry maturity.

Companies/Assets Involved

• Airtel Africa: The primary subject of the report. Bullish view: its mobile money business is undervalued, the core Nigerian business generates strong cash flow with promising growth, and the overall valuation is highly attractive.
• MTN Nigeria: As Nigeria’s largest telecom operator (with over 80 million customers), it is Airtel’s main competitor and a market benchmark.
• Mastercard: As a minority equity investor in the mobile money business, its investment serves as corroborating evidence of the business’s value.

Investment Implications

For investors willing to take on specific currency (primarily the Naira) and geopolitical risks, Airtel Africa offers a significant value opportunity. The investment thesis is based on: 1) substantial revaluation potential in the mobile money business, possibly realized through a spin-off or IPO within the next four years; 2) even under the most conservative assumptions (using the Nigerian parallel market rate and ignoring growth), the company’s valuation (approximately 10x P/E, 9x free cash flow) remains highly attractive; and 3) the core telecom business continues to provide solid cash flow and growth foundations, driven by multiple levers such as subscriber growth, data penetration, and usage increase. The Nigerian mobile money business, though constrained, remains a potential incremental profit source, and this potential is not yet reflected in the current stock price.

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Theme and Background

This chapter provides an in-depth analysis of Airtel Africa’s mobile money business user value, profit margin assumptions for each business segment, and forecasts of the company’s future free cash flow and return on investment under different scenarios. At the same time, the report also assesses currency risk across major operating markets outside Nigeria to judge the reliability of its U.S. dollar financial statements.

Core Thesis

The author’s central argument is that even under fairly conservative assumptions (e.g., declining telecom ARPU, currency depreciation), an investment in Airtel Africa still offers highly attractive returns (23% IRR in the base case). The report contends that current share prices are cheap enough to offset potential currency depreciation risks, and the likelihood of investment losses is very low.

Key Arguments and Data

The report sets up three scenarios—bear, base, and bull—and uses key operational and financial assumptions for valuation calculations.

1. Key Operational and Financial Assumptions:

• Mobile Money (MM) ARPU: Has grown from $19 to $22 per year in recent years, but the base scenario conservatively assumes it remains unchanged.
• Profit Margins: Telecom EBIT margin stood at 49% in 2022, with a historical upward trend; the mobile money business’s EBIT margin is unusually stable, staying around 50% over the long term.
• Mobile Money Penetration (ex-Nigeria): Already exceeds 40% in several markets and is expected to trend toward 100% over the next decade. The base scenario assumes penetration rises from 36% in 2023 to 45% by 2027.
• Terminal P/E: Set at 6x, 10x, and 13x in bear/base/bull scenarios respectively. The author believes this is conservative, given that the source of terminal free cash flow will increasingly come from the mobile money business.

2. Scenario Analysis and Return Projections:

Scenario	Key Assumptions	Projected 2027 FCF	Expected Investment IRR (from £120/share)
Base Case	Telecom ARPU declines 3% p.a.; MM ARPU flat; Telecom EBIT margin 49%; MM EBIT margin 50%; 2027 ex-Nigeria MM penetration 45%; Terminal P/E 10x	Grows from $592M in 2022 to $843M	23%
Bull Case	Telecom ARPU flat; MM ARPU grows 3% p.a.; Telecom EBIT margin rises to 52%; MM EBIT margin 50%; 2027 ex-Nigeria MM penetration 50%; Terminal P/E 13x	Grows from $592M to over $1B	37% (capital more than triples in four years)
Bear Case	Telecom ARPU declines 10% p.a.; MM ARPU declines 3% p.a.; Telecom EBIT margin falls from 49% to 44%; 2027 ex-Nigeria MM penetration only 40%; Terminal P/E 6x	Falls from $592M to $514M	-1%

3. Currency Risk Analysis:

The report evaluates the currency situation of major markets one by one and concludes that, outside Nigeria, other major currencies do not show a widespread black market exchange rate indicating a severely overvalued official rate.

• Kenyan Shilling: Depreciates ~5% p.a.; a black market exists but the spread is within 10% of the official rate, making financial data broadly reliable. Airtel has 16 million users in the country, with its share rising from 20% in 2017 to 26% currently.
• Tanzanian Shilling: Depreciates ~3% p.a.; no evidence of a parallel currency market.
• Congolese Franc: Has depreciated ~10% p.a. since 2015; the government operates a “managed float” regime.
• Zambian Kwacha: Has depreciated 14% p.a. since 2015, the worst performer; a parallel market may exist.
• Central African / West African CFA Franc (XAF/XOF): Pegged to the euro, backed by the French Treasury, and has remained stable since its devaluation in the late 1990s.

Companies/Assets Involved

• Airtel Africa: The core subject of the report’s analysis. Bullish. The author’s institution made a significant investment in it at the start of the second quarter.
• Safaricom: Dominant player in Kenya’s telecom and mobile money markets, and Airtel Africa’s main competitor in the country.

Investment Implications

For investors, Airtel Africa presents an asymmetric risk-reward opportunity. Even under a conservative base-case model that accounts for telecom ARPU decline and currency depreciation, the expected return (23% IRR) remains very substantial. The report details that currency risk outside Nigeria is manageable, and the company’s fundamentals are improving (user growth, market share gains, expanding data usage, huge mobile money potential). The current extremely low valuation (the bear scenario assumes only a 6x terminal P/E) already provides a sufficient margin of safety. Investors willing to accept its geopolitical and currency risks could achieve substantial returns.