One of the shares I added to my portfolio over the past few weeks is mobile operator Airtel Africa (LSE: AAF). Its shares have fallen by a quarter in the past 12 months and I saw this as a buying opportunity.
Here’s my logic.
Huge potential for digital money
Mobile phones go hand in hand with digital money. The use of mobile money is growing fast in Africa but I see large growth opportunities still ahead. I think that could translate into profits for Airtel Africa.
In the first half, the company’s mobile money services customer base grew 24% while transaction value surged 31% to $86bn. That is the total size of the transactions, not Airtel Africa’s revenues from them. But the numbers show how large the company’s mobile money business is already, with the potential for commission and fees that offers.
That should grow now that the company has launched its mobile money business in Nigeria, which I expect to be a big driver for future profits. There is also substantial room for growth in the firm’s existing customer base, as 78% of its customers are not yet using the business’s mobile money services.
Growing market
I also like the fact that the company’s focus is on large markets in Africa that benefit from big populations of young adults and underdeveloped economies. That ought to give the business a long runway both for phone services and mobile money.
Other phone companies are also active on the continent, but Airtel Africa has established critical mass in large markets.
It currently has 48m mobile voice customers in Nigeria, 63m in East Africa and 28m elsewhere on the continent. That customer base grew 10% year-on-year. It also has a sizeable base of mobile data customers, which is growing even faster in percentage terms.
While mobile money could be a growth rocket that helps drive up the long-term value of Airtel Africa shares, I think the underlying opportunity for the business in mobile voice and data services is already impressive.
I’ve bought these shares
However, this investment case is not exactly new. Previously, I had decided not to invest in the company because of some of the risks.
One is the capital expenditure typically required in the telecoms industry, which helps explain why the company ended last year carrying $3.6bn of net debt on its balance sheet. Another is the political risks involved in operating in volatile African markets such as Nigeria.
I still see those risks as relevant. But Airtel Africa shares have been getting cheaper. They fell 27% over the past year. They now trade on a price-to-earnings ratio beneath 8, which looks cheap to me.
Set against an improving business performance in many areas and the prospect of booming mobile money demand, I felt the risk to reward ratio on offer matched what I was looking for. So I have tucked the shares into my ISA in the hope of long-term growth.
