In theory, the Jumia IPO should not affect demand for Airtel Africa shares because they have different business models, argues Andrew Sekandi, an investment adviser at Alpha Sierra in London.
Airtel Africa, he argues, deserves to be judged on its own merits. “But capital markets being what they are, Jumia’s success may draw in some retail investors and maybe even some institutions that would not previously have considered betting on an Africa-focused stock,” Sekandi says.
That was before a report from Citron Research slammed Jumia’s IPO filing.
But Airtel Africa certainly has a strong story of its own to tell in a growth market context.
- According to Ovum’s Africa Digital Outlook 2019, mobile revenue in Africa will increase from $54.9b in 2017 to $68b in 2022. Non-SMS mobile data revenue – from mobile broadband access and mobile digital services – is expected to more than double to $32.1bn over that period, Ovum says.
- And, unlike Jumia, Airtel Africa is profit-making.
The company had a net profit of $83mn in the fourth quarter of the 2018-19 year to March, driven by its Airtel Money platform, after a loss of $49mn in the year-earlier quarter. “Some investors will see the Jumia and Airtel IPOs as essentially a bet on the growth of African consumer markets and the middle class, so this could help Airtel,” Sekandi says.
Airtel has operations in 14 African markets including Kenya, Tanzania, Nigeria and Ghana. India’s Bharti Airtel established its presence in Africa by buying Kuwait-based Zain’s Africa operations for $10.7 billion in 2010. The company has grown to become Africa’s second-largest telecoms company, with over 94 million customers, and is in the top two carriers in most of the countries where it operates.
- The IPO, which may be for about $1b, would be one of London’s biggest this year.
- Institutions have already given Airtel Africa a vote of confidence. Investors including Warburg Pincus, Temasek, Singtel, SoftBank and the Qatar Investment Authority (QIA) have invested $1.45b in Airtel Africa through primary equity issuance, with the proceeds being used to reduce debt.
“Saved by Africa”
Equity analysts at Emkay in India took a sceptical view of Airtel Africa’s owner Bharti Airtel in a February note, rating the stock as “reduce” due to a weak balance sheet and lack of a clear turnaround strategy.
- But Emkay wrote that the African business remains steady, with improvement in revenues and Ebitda meaning that margins were maintained.
- Airtel Africa is likely to remain steady going forward, Emkay wrote.
- Airtel was “Saved by Africa” in the face of falling profit margins in India, according to October 2018 research from Bond Critic published on Smart Karma.
- Bond Critic argued that Airtel’s expansion into Africa has been credit positive.
- Indian broker Motilal Oswal, in research on May 7, forecast that the Airtel Africa’s mobile subscriptions will increase by 10.7% for the full year 2019-20, while wireless traffic minutes will show growth of 18%.
- Motilal Oswal, which rates Bharti Airtel as buy, says the Africa business has been playing a key part in overall growth for the Indian company.
- Strong momentum in Africa should continue on the back of potential to increase revenue share in some markets and growth in the use of Airtel Money, Motilal Oswal says.
Sekandi at Alpha Sierra says that Airtel Africa looks fundamentally strong, as it is one of the market leaders in a region which is still seeing mobile annual revenue increases above 20%. In his view, there are two questions that the company sill needs to answer.
- Airtel needs to show that it can reduce its reliance on Nigeria, which accounts for a disproportionate amount of revenue, and improve in a comparatively weak position in east Africa.
- Airtel also needs to demonstrate that it can invest in new technologies such as mobile broadband and digital services fast enough to make up for the slowing of traditional revenue streams which are being eaten up by free and low-cost services like WhatsApp and Skype.
- Note that Motilal Oswal predicts that Airtel Africa’s average revenue per user will drop 2.3% in the current year.
Bottom Line: The weight of institutional support that has already been shown for Airtel Africa indicates that the IPO is set to succeed – in the absence of a shock to global stock markets in the meantime.
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