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A small-cap FTSE 250 company to buy now and hold forever

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When considering where to put my hard-earned money for a long period of time, it’s important to understand comprehensively the business that I choose. This means knowing its competitive advantage, the competence of its management and what gives the business longevity, even through economic downturns. As Warren Buffett once said, the way to know if you should buy a stock is to ask yourself ‘would I be happy to buy now if the market were to close for 10 years tomorrow?’

This gives me confidence that Airtel Africa (LSE: AAF) is the right choice for a long-term play, as the answer to the previous question is yes. Despite being one of Africa’s largest telecommunication providers, Airtel Africa is relatively unknown to many investors, which makes it somewhat of a dark horse of the FTSE 250.  

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Financials

The Airtel share price is up 26% this year, which is attributable to a very solid set of financials, including its most recent quarter, in which constant currency growth reached 33.1% year-on-year. Many companies have seen strong revenue and profit growth in the past 12 months due to the negative impact of government restrictions, which caused abnormally bad results last year. However, Airtel never stopped growing, and Q1 revenues increased from $796 million to $851 million between financial years 2020 and 2021 and then to $1112 million for the current financial year. The FTSE 250 stock’s operating free cash flow was also up by 38.7%, indicative of the underlying strength of the business.  

Add to this the fact that Raghunath Mandava (the CEO) proclaims that We have posted strong double-digit growth across voice (26.0%), data (37.4%) and mobile money (53.7%), and across all our regions”, and Airtel looks seriously impressive. On a side note, Mandava has been at the company since 2003, so has overseen large parts of its growth.

Exciting emerging markets

Apart from Airtel’s financial strength, it is attractive in a macroeconomic sense too. It is the second largest telecom operator in Africa, the pinnacle of emerging markets. It has extensive infrastructure in countries such as Kenya and Niger, which combines more mature and less developed countries, giving Airtel some balance to its client base.

Headwinds for Airtel

Airtel, like any other business, comes with risk. By far its largest single market, Nigeria has suffered from currency devaluation and regulation over the last year, including a ban on USD charges on mobile payment services and new regulations on SIM registrations, which has negatively affected customer base growth. This is a problem quite specific to Airtel and is one of the drawbacks of operating in relatively unstable territories.

Financial review for the quarter ended 30 June 2021

Nigeria

Description

Unit of

measure

Quarter ended

June-21

June-20

Reported currency
change %

Constant currency
change %

Summarised statement of operations

 

 

 

 

 

Revenue

$m

445

341

30.5%

38.2%

Source: Airtel Africa Q1 22 results

My takeaway

Overall, Airtel still remains a company that has strong long-term credentials across mobile money, data and phone services and a consistently increasing customer base. I would therefore be happy to buy this FTSE 250 stock for the long term.

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Guy Quelch owns shares in Airtel Africa. The Motley Fool UK has recommended Airtel Africa. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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