I’m thinking about selling my Vodafone (LSE:VOD) shares. I bought my first tranche in November 2022 at 99p. Fifteen months later, I added some more at 70p. With the shares now (8 December) changing hands for around 95p, it means I’ve finally broken even.
But should I now bail out and buy another stock in the same sector?
Of course, it’s easy to look back and say I should have bought something else. For example, since December 2022, the share price of Airtel Africa (LSE:AAF), the FTSE 100 mobile telecommunications provider, has risen 164%.
This suggests I backed the wrong horse. But savvy investors know it’s never too late to invest in a quality company.
Right place, right time
Airtel Africa has 166.1m customers in 14 markets across a continent with a rapidly growing population. With a median age of 19.3, the region also has a very young demographic. It’s estimated that 60% of its population is aged under 25. And the one thing young people appear to want is a mobile phone.
The group’s clearly operating in a growing market. And this is showing in its financial performance – its revenue’s grown by an average of 19.3% a year over the past five years.
But the group’s shares are more expensive than Vodafone’s. During the 12 months to 30 September, Airtel Africa reported $2.05bn (£1.55bn) of adjusted EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases). This means its valued at 7.5 times its trailing 12-months earnings. Its larger rival’s multiple is only 2.3.
But Vodafone also has a thriving business in Africa where it has 93.7m customers. During the six months ended 30 September, the division contributed 20% of group revenue and 23.5% of adjusted EBITDAaL.
Another approach
However, in common with most in the industry, both groups have a significant debt pile. And borrowings are an important factor when considering company valuations.
Using each group’s enterprise value (EV) relative to earnings, the valuation gap between the two closes but Airtel Africa’s still more expensive. By comparison, PricewaterhouseCoopers says a typical EV/EBITDA ratio (I’ve used EBITDAaL) in the sector is 7-10.
| Measure | Vodafone | Airtel Africa |
|---|---|---|
| Market cap (£bn) | 22,577 | 11,624 |
| Net debt (£bn) | 33,651 | 4,166 |
| Enterprise value (EV) (£bn) | 56,228 | 15,790 |
| EBITDAaL (£bn) | 9,896 | 1,551 |
| EV/EBITDAaL | 5.7 | 10.2 |
But each group has its own specific challenges. Airtel Africa’s exposed to some volatile currencies. And it operates in a politically unstable part of the world.
As for Vodafone, a law change concerning the bundling of TV contracts means it’s losing customers in Germany, its biggest market. Its large debt also makes it vulnerable in a higher interest rate environment.
My verdict
I have long thought – and still do – that investors are undervaluing Vodafone. And the recent recovery in its share price suggests more are starting to share my view. Although my three years as a shareholder have been frustrating, I’m a long-term investor so I have no plans to sell.
As for Airtel Africa, I think it’s operating exclusively in a part of the world that’s going to see significant growth — both in terms of population and income — over the coming decades. And I see no reason why it can’t replicate its successful business model in other countries on the continent and elsewhere.
The future looks bright for these two telecoms shares. That’s why I think both are worth considering.
