The Airtel Africa (LSE: AAF) share price has risen by over 60% since it floated in 2019. That performance could leave Vodafone shareholders feeling jealous. Their shares have fallen sharply over the same period.
The latest numbers from African mobile operator Airtel suggest to me that it could continue to outperform FTSE 100 stalwart Vodafone.
Airtel Africa is the second-largest mobile operator in Africa, operating in 14 countries. The company competes with Vodafone in some of these, but not all of them.
Airtel also has a fast-growing mobile money business. This provides basic banking services to many users who don’t have access to conventional banks.
Strong growth
For me, the big attraction of this business is its growth potential. The group’s third-quarter numbers highlighted this appeal.
Total customer numbers rose by 9.1% to 151.2m during the nine months. Within this, the number of data users rose by 22% to almost 63m, while the mobile money customer base grew by 20% to just under 38m.
Average monthly revenue per customer rose by 10%, “driven by increased usage”.
European mobile operators can only dream of this kind of growth. In our mature, competitive markets, winning a new customer means persuading someone to switch from a competitor. It’s slow and expensive.
Are profits rising too?
Airtel’s headline numbers for the last nine months look pretty impressive, at least to start with. The company says that revenue for the nine months to 31 December rose by 20% on a constant currency basis – this excludes the impact of changing exchange rates.
The only problem is that exchange rates did change. A lot.
Both Nigeria and Malawi experienced major currency devaluations last year. As a result, the value of Airtel’s local currency earnings in those countries fell sharply when they were translated back into US dollars (Airtel’s reporting currency).
The impact is clear – its reported revenue for the nine months fell by 1.4% to $3,861m, while its after-tax profit collapsed to just $2m, down from $523m in the same period of 2022.
This sounds like a disaster, but I’m not sure it’s quite as bad as it seems. I expect these exchange rates to stabilise gradually and don’t expect this problem to repeat.
In the meantime, it’s worth remembering that the company also has costs in local currency – so underlying profitability has remained stable.
If I exclude some of the currency-related finance charges, Airtel Africa’s operating profit for the nine months was almost stable at $1,293m, just 2% lower than one year earlier.
That gives an impressive operating margin of 33%, which is far better than Vodafone’s figure of around 12%.
Airtel Africa: what I’m doing
Currency problems are one risk when investing in overseas businesses. But personally, I think the main concern with African companies is the risk of inconsistent government policy — and perhaps corruption.
These risks exist for Airtel Africa, in my view, but I think the business has a good track record of managing them well.
I own shares in Airtel Africa and am happy to keep holding them after these results.
Indeed, with the stock trading on around nine times 2024/25 forecast earnings and offering a 4% dividend yield, I think this stock remains quite reasonably priced.
