Potentially 67% undervalued, I love the look of this FTSE 100 company

Good investing is all about finding opportunities for the right price. I think this FTSE 100 company could be top of my list.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In the ever-evolving telecommunications landscape, Airtel Africa (LSE:AAF) stands out as a potentially undervalued gem in the FTSE 100. This telecoms powerhouse really catches my eye, with some analysis suggesting it could be trading at a significant discount. I’ve been a fan of this company for a long time, so is there still more growth ahead?

Growing market

The firm provides telecommunications and mobile money services across 14 African countries, focusing on Nigeria, East Africa, and Francophone Africa. It has positioned itself at the forefront of the continent’s digital revolution, offering a range of services from basic 2G to advanced 5G networks, along with innovative mobile money solutions. With populations growing rapidly in these areas, and major demand for technology, the company looks ready to take advantage.

The numbers

The company’s financial performance has been robust, with trailing 12-month (TTM) revenue reaching £3.95bn. Despite a challenging year for many in the telecom sector, the business has outperformed both its industry peers and the broader UK market, delivering a 9% return over the past year compared to the UK wireless telecom industry’s 3.9% and the UK market’s 6.3%. Not exactly earth-shattering, but in a sector with reliable growth, strong forecasts, and an experienced management team, I’m interested.

Valuations

What makes an investment particularly intriguing is the potential undervaluation of the shares. According to a discounted cash flow calculation (DCF), the shares are trading at a staggering 67.9% below estimated fair value. There’s a lot to like when digging into the detail behind this too, with forecast earnings growth of 39.77% per year, significantly above the market average. This projection is underpinned by increasing mobile penetration and data usage across Africa.

I’m also a big fan of the other metrics that investors tend to pay attention to for this sort of company, with a price-to-sales (P/S) ratio of 1.1 times suggesting that the firm is priced at good value compared to both its peers and the broader industry.

Risks

While the investment case here is compelling, it’s crucial to consider the risks. The debt-to-equity ratio of 103.2% indicates a significant debt burden, which could limit financial flexibility. I also have some concerns about the recent earnings, showing a loss of £130.50m, and a negative net profit margin of 3.3%. Clearly there are challenges in translating increased revenue into bottom-line profits.

The dependence on business in emerging markets also worries me slightly. Such an investment always comes with inherent risks, including sudden regulatory changes, currency fluctuations, and political instability.

Next steps

Despite these challenges, the firm’s strong market position, impressive projections, and apparent undervaluation make it an intriguing prospect. The focus on mobile money services and expanding data usage aligns well with the ongoing digital transformation across Africa. As internet penetration and smartphone adoption continue to rise, Airtel Africa is well-positioned to capitalise on these trends.

As a long-term investor with a relatively high risk tolerance, I see there is a lot of potential here. If the company can continue to execute well, and capture market share in such a growing sector, there could be some real growth over the coming decades. As a result, I’ll be adding to my position at the next opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has positions in Airtel Africa Plc. The Motley Fool UK has recommended Airtel Africa Plc. 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.

More on Investing Articles

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »

Investing Articles

What would I do if Rolls-Royce shares plunged 50%? History suggests a big decline is coming

While Rolls-Royce shares have delivered massive outperformance in recent years, they also have a history of significant declines.

Read more »