Airtel Africa: Strong growth; value add to Bharti

Strong growth led by East Africa/Francophone
Airtel Africa posted a healthy performance in 2QFY23 with revenue/EBITDA growth of 4.1%/3.9% QoQ on reported basis; while on CC basis, revenue/EBITDA grew 6.7%/7.1% QoQ to USD1.4b/USD663m (5% above estimate), respectively. EBITDA margin improved 20bp to 48.9%. Reported PAT was down 15% QoQ to USD152m due to net finance cost of INR206m (+36% QoQ), higher tax rate and exceptional loss of USD21m. Adjusting for the exceptional loss, PAT declined 3% QoQ.

ARPU and subs growth remains strong
Reported ARPU grew 6.9% QoQ to USD3.1, while subscriber base rose 3m to 135m (in line). Region-wise, East Africa’s ARPU/Subs grew 5% QoQ each that supported revenue growth of 10% QoQ (in CC terms) to USD501m with healthy 8%/12% QoQ growth in voice/data revenue, respectively. EBITDA (in CC terms) rose 16.5% QoQ. Francophone Africa’s (in CC terms) revenue/EBITDA rose 6.8%/ 18.8% QoQ to USD315m/USD158m fueled by 5%/8% increase in Voice/Data revenue QoQ, respectively. On the contrary, Nigeria reported healthy 3.8% QoQ revenue growth in CC terms, but EBITDA was down 2.6% QoQ.

Rising 4G penetration to fuel growth
Airtel Africa continued to invest in 4G network to expand the breadth and depth of the network with ~USD170m spent towards 4G spectrum acquisition. It reached almost 99%/88% of 4G site coverage in Nigeria/East Africa, respectively, while 69% coverage was achieved for Francophone. However, the total 4G penetration of data customers was 45.2% in 1HFY23, a 14% rise over the last two years. Rising 4G penetration on coverage combined with transparent and affordable offerings would lead to growth.

Operating FCF flat; gross debt declines

• EBITDA improved sequentially to USD663m (from USD619m in 1QFY23); but due to higher tax rate and capex, the Operating FCF was flat at USD472m. Capex rose 20% QoQ to USD169m, in line with guidance, as the company continued to invest in technology upgrade. Airtel Africa acquired spectrum in key markets including DRC and Kenya. Its gross debt reduced to USD2b in 1HFY23 from USD2.3b in FY22; leverage ratio (Net Debt to EBITDA) remained at 1.3x QoQ.

Highlights from the management commentary

• Capex guidance (excluding Spectrum) stood at USD700-750m in FY23, of which USD310m already incurred. Further, it will continue to focus on: a) strengthening the balance sheet and b) maintaining its dividend distribution.
• Airtel Africa acquired spectrum in Kenya, DRC and the Seychelles with an investment of USD82m. Additionally, the company acquired spectrum in Zambia and Tanzania for USD89m.
• Nigeria’s EBITDA margin dipped primarily due to the recently launched (Jun’22) mobile money service – Smartcash, which elevated the operating expenses.
• Early redemption of USD450m HoldCo bond prepayment in Jul’22 was made out of the internal accruals. The remaining debt at HoldCo now stands at USD550m.

Valuation remains compelling, can add to Bharti’s SOTP
Airtel Africa is trading at 3.4x EV/EBITDA on 2QFY23 and 3.0x on FY24E. Further, if we exclude the ~11% stake sold in the Mobile Money business to MasterCard and TPG Group at an 11x valuation, the remainder of the Airtel Africa business (growing over 20% annually) is valued at 2.5x on 2QFY23 annualized number. Airtel Africa has consistently delivered strong earnings growth over the last 3–4 years, with a ~20% CAGR over FY19–22. A strong balance sheet with low leverage and healthy FCF further adds to the strong capabilities. On 5x multiple, it could offer 70% upside hereafter, implying 7-8% upside for Bharti. Our SOTP-based TP for Bharti stands at INR930, including INR102/share value from Airtel Africa at 5x EV/EBITDA for FY24E. Given the double-digit EBITDA growth, health FCF generation, and steady deleveraging, the current valuation should only improve going ahead.

CT Bureau