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Helios Towers faces challenges from debt and slow growth

By David Whitehouse
Posted on Thursday, 14 November 2019 13:01

A vendor assists a client to recharge her cell phone airtime at an open air stall in Kinshasa, Democratic Republic of Congo January 1, 2019. The DRC is a key growth market for Helios Towers. REUTERS/Kenny Katomb

Helios Towers, the operator of phone masts in sub-Saharan Africa, will report third-quarter results on November 14, its first financial report since its IPO in London in October.

The market will be watching for signals on the company’s cost structure and its progress in slower growth markets.

  • Helios operates in the Democratic Republic of Congo (DRC), the Republic of Congo, Ghana, South Africa and Tanzania.

Analysts at Lightstream Research are bullish on the company’s long-term prospects. The company’s revenue is predicted to increase at a compound annual growth rate of 4.5% from 2018 to 2021.

  • Growth in Tanzania and the DRC will be driven by strong demand for network infrastructure, underpinned by a growing mobile subscriber base and 3G/4G adoption, Supun Walpola, an equity analyst at Lightstream in Sri Lanka, wrote in research published on Smart Karma in October.

Tanzania’s mobile subscriber base is projected to grow at a seven-year compound rate of 4.2% from 2017 to 24, the research says.

  • This will increase Tanzania’s mobile penetration from 69% in 2017 to 81% in 2024 and generate strong demand for both new towers and additional capacity at existing towers.

Since the share sale, which was priced at 115 pence, the stock has held steady at around that level.

The company’s customers consist of Africa’s “Big Five” mobile network operators, Airtel, MTN, Orange, Tigo, and Vodacom.

  • The average contract length with Helios is between 10 and 15 years, providing stability in revenue once a customer is on board.
  • But the reliance on a small group of customers may become a risk for the company: the IPO prospectus notes that mergers or consolidation among them could have a “material and adverse effect” on the revenue and cash flow.

Further, the post IPO debt to equity ratio of 57% seems “slightly” high and “could deter the company’s ability to expand aggressively in the long-run,” Walpola wrote.

  • The prospectus says that indebtedness may increase in the future to fund expansion, and noted restrictive debt covenants that limit the company’s ability to pay dividends.

Slower growth countries

Organic growth prospects in South Africa “don’t look very attractive,” according to Lightstream.

  • Mobile subscribers in South Africa are expected to grow at a modest seven-year compound rate of 2.3%, while 4G penetration in the country already exceeds 70%.
  • However, nearly 85% of the tower operations are carried out in-house by the top three mobile operators in the country, MTN, Vodacom and Gyro Telkom.
  • Helios is therefore likely to look to gradually buy its way into the South African market over the next few years, Lightstream says.

South Africa is “alien territory for them and the way business is done in South Africa could be a lot different from the markets that they are operating right now,” Walpola says. Still, inorganic growth is not new to the company. “They have been doing it for a while and have been successful so far,” he says.

In Ghana and the Republic of Congo, problems are mostly on the growth front.

Given already high penetration rates, the mobile subscriber bases in the two countries are expected to grow at very modest rates, which limits the need for new network infrastructure.

  • In the Republic of Congo, a low tenancy ratio suggests that there is plenty of unutilised capacity in the country, which Lightstream sees as sufficient to cater to sluggish demand.
  • There is very little room for Helios to grow in Ghana, with American Tower Corporation operating 79% of all marketable towers in the country. “
  • We are not very confident about Helios Towers’ prospects in Ghana going forward,” the Lightstream research says.

Bottom Line: Given its debt level, Helios may need to focus on its most promising growth markets to avoid spreading itself too thin.

 

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