Airtel Africa (LSE: AAF) is a telecommunications firm operating in 14 different African countries, which listed on the London Stock Exchange in 2019. Since its listing, I have been impressed with the way that the FTSE 250 stock has grown profits, reduced debt and capitalised on new opportunities. It has also performed resiliently throughout the pandemic, and the shares have risen over 100% since its lows in May last year.
Nonetheless, the stock has dipped recently due to large sales from some institutional investors. After the strong performance of the Airtel Africa share price since last year, these sales could have been motivated by a desire to bank profits. Despite this, I think its recent dip offers a good time to buy.
Trading update
In 2020, Airtel Africa was able to grow profits by over 25% to $901m, while revenues also exceeded $3.4bn. This was enabled by strong customer growth of 11.9%. With Africa still a largely unpenetrated market, further customer growth seems very possible.
In the trading update, net-debt-to-underlying EBITDA also improved to 2.1x from 3x. Before listing on the stock market, the company had an excessive amount of debt. As such, it’s pleasing to see the company reducing the level to allow for further investment in the future.
Airtel Africa also pays a strong dividend. Indeed, this year the company has announced a dividend per share of 3 cents. This equates to a yield of around 3%, which beats that of most other FTSE 250 stocks. Due to “prudent cash management“, this dividend is also lower than management had previously envisioned, and this means that there is scope for it to rise in the future.
Opportunities ahead
I am excited by the company’s future prospects. Within Africa there is huge unmet demand for data and through investments, Airtel Africa has been able to start catering for this demand. It is also likely that demand for the company’s services will continue to grow. This is due to population growth and the fact that 32% of the population in these markets is aged between 10 and 24 years old. Accordingly, profit and customer growth seems likely and, hopefully, this will be met with a rising share price and dividend.
I also like the fact that the company is forging partnerships with other businesses to enhance growth. For instance, Mastercard has recently invested $100m in Airtel Africa’s mobile money operation, in return for a 3.75% stake in this subsidiary company. The proceeds from this transaction will be used for reducing debt and further investment. It also demonstrates that other companies are optimistic about Airtel Africa’s products.
Risks with the FTSE 250 stock
Despite my overall positive view, there are still risks associated with the business. For example, the company has negative working capital, meaning that its current liabilities outweigh current assets. This may mean problems with the company’s liquidity, and it may struggle if cash flows are ever hit hard.
Nonetheless, with a price-to-earnings ratio of around only 10, the stock does seem cheap. Along with its ability to grow profits, I am not deterred by this risk. As such, I will happily be buying more Airtel Africa shares at its current price.
