I’m always on the lookout for shares that can double my money. For this, I look for strong profit and revenue growth, modest valuations in comparison to peer companies and large sector growth. Airtel Africa (LSE: AAF) seems to fit all these criteria, and despite several risks associated with the company, I feel that this FTSE 250 stock has the potential to boost my returns. Here’s why.
What does Airtel Africa do?
Airtel Africa is a telecommunications company that operates in 14 countries in Africa. It also operates in mobile money, a sector which is extremely unpenetrated within the continent.
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The firm has managed to deliver very strong growth over the past few years. Indeed, in the FY19 results, the company recorded pre-tax profits of $348m, yet in the first half alone of FY22, it has already managed to deliver pre-tax profits of $567m. For the full year, pre-tax profits are expected to reach at least $817m, a 135% increase from two years ago. Pre-tax profits in FY23 are expected to reach near to $1bn. As such, it’s clear that the company’s growth is very strong.
But I don’t believe that these growth prospects are fully reflected in the valuation. In fact, using this year’s results, Airtel Africa has a price-to-earnings ratio of around 12. This is an extremely modest P/E ratio for a company that’s growing at such a quick rate and is lower than the average among FTSE 250 stocks. Further, Vodafone, which also operates in the telecommunications sector, has a current P/E of 24. This is despite the fact that it’s seeing extremely limited growth. Accordingly, if Airtel Africa was to reach a similar valuation to Vodafone, it would have to double in value. Therefore, this seems a reasonable target, especially as Airtel Africa has far higher growth prospects than Vodafone.
There are several risks that could disrupt this growth however and prevent the shares from doubling in value, instead seeing their value decrease. For example, although Africa is a high-growth, underdeveloped market, which should help propel growth, there is also instability in the area. This includes the current fragile state of democracy in Nigeria, where the firm generates around 40% of sales.
There is also rising competition on the continent, a factor that could slow growth. This includes companies such as Orange and Telecel Centrafrique.
What am I doing with this FTSE 250 stock?
Airtel Africa already makes up one of the largest positions in my portfolio, and I may buy even more. As already demonstrated, it trades on a low P/E ratio, and from a valuation perspective, to me, the shares seem capable of doubling in value.
It also has a subsidiary, Airtel Money, which has recently prompted an investment from Mastercard. This implies that it has extremely high potential, another factor that points to rising profits in the future. Banking is a still-developing market in Africa, and the sector is expected to expand rapidly. This offers further upside potential.