Higher finance costs contracts Airtel Africa’s Q1 2023 earnings to $178 million

Airtel Africa on July 28, 2022, released to the investing public its Q1FY23 financial statements. The report showed that net profit grew by 25.26% in the fiscal quarter of 2023, and 27% of the company’s FY 2022 earnings, broadly due to higher finance costs and regulatory/government policy changes in the Nigerian segment of the company’s business.

The company’s net finance costs in June 2022 quarter grew by 55.67% (37.47% of the FY 2022 net finance costs) to $151 million from $97 million. The company said in its quarterly report, “Net finance costs increased by $54 million, as a result of $51 million higher foreign exchange and derivative losses and $6 million higher interest on lease obligations, partially offset by lower interest costs due to debt reduction (including the repayment of $505 million bonds in March 2022).

Also, the headwinds faced by the company as a result of outbound voice calls barring customers who had not yet registered their National Identification Numbers in Nigeria affected the company’s bottom line. This is expected because voice revenue accounts for almost half of the company’s revenue. In 2022 FY, it accounted for 49% and in Q1FY23, it accounted for 47% of total revenue.

The company’s revenue for the Q1FY23 ended June 2022 grew by 13.04%-on-year to $1,257 million and 2.8% sequentially in reported currency. This represents 27% of 2022FY total revenue of $4,714 million, representing a growth of 21.24%. If this trajectory is sustained, the company is likely to surpass 2022FY revenue in 2023FY, especially with the continued growth in customer base; growth in data customer base and mobile money customer base.

In a statement, Segun Ogunsanya, chief executive officer at Airtel Africa said, that the company has improved its margins amid ‘strong earnings growth’. However, a cursory look at the financials shows that the Company’s EBITDA and operating profit margins have been growing and impressive. The net profit has been growing and consistent too, but not as impressive as EBITDA and Operating profit margins broadly due to higher net finance costs. The company’s net profit margin stood at 16.02% in 2022FY; representing a growth of 50% and 14.16% in Q1FY23, which is a growth of 11%-on year. This means that the company on average is earning $0.162 per $1 in revenue. Typically, a net margin of 20% and higher is a very strong result

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Investment Perspective

It is important to look for and invest in companies with consistency in revenue, earnings, impressive margins, reducing debt, good capital gain, impressive balance sheet, etc.

Airtel Africa has been listed on the NGX since July 9, 2019, and is currently the most valuable stock on the NGX with a market capitalization of N7.16 trillion, which makes about 26.4% of the entire Nigeria Stock exchange equity market.

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On July 29, the last trading day, Airtel Africa closed at N1,905.40 per share price on the NGX. It began the year with a share price of N955 and thus has gained 99.5% on that price valuation, ranking it 8th on the NGX in terms of year-to-date performance which is higher than the broad market NGXASI, which has gained+17.18 % YtD. This means that a shareholder who invested N1,000,000 at the beginning of the year would have made N995,000. This is impressive and a strong result.

The Telco had on May 13, 2022, announced a final dividend of 3 cents per ordinary share to be paid on or around July 22, 2022, to shareholders whose names appeared on the register of members at the close of business on Friday, June 24 , 2022, bringing the total payout to 5 cents for the 2022FY. Therefore, in terms of dividend-only return, Airtel Africa offers 2.5% dividend yield (TTM). It is important to note that dividend yields change relative to the stock price. Holding dividend constant, the yield will rise when the price of the stock falls and will fall when the price of the stock rises.

The company’s operating free cash flow positive growth has been consistent. In 2022FY, it grew by 40.5% to $1,655 million from $1,178 in 2021, while in Q1FY23, it grew by 10.3%, in spite of the 34% growth in Capex. The free cash flow reveals to investors and other stakeholders that there is enough cash remaining to pay back creditors, pay dividends, and buy back shares. Considering this, the company is likely to be able to sustain its dividend payment policy.

The Telco is the 93rd most traded stock on the NGX over the past three months; trading just a total volume of 7.77 million shares over the period. Investors should note that it is better to buy and hold heavily traded stock as thinly traded stocks may not be easily sold or exchanged for cash without a significant change in price. Thinly traded stocks are exchanged in low volumes, and have liquidity risk; as they are riskier than liquid assets, because a small number of participants can impact the price

Airtel Africa has shown consistency in reducing its debt and growing its EBITDA. While the company’s EBITDA grew by 27% on-year, its net debt fell 13.57% to $3,055 million from $3,536 million. Although the net debt increased sequentially by 3.91%, investors should be optimistic as net debt to EBITDA has been on a downward trajectory; dropping from 2.0x in 2021FY to 1.3x in 2022FY, then dropped to 1.3x in Q1FY23 from 1.8x in Q1FY22. Investors should take note of this ratio; because it shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. Typically, ratios higher than 4 or 5 set off alarm bells because it indicates that a company is less likely to be able to handle its debt burden and thus is less likely to be able to take on additional debt for growth.

With the company’s focus on sustaining profitable growth from underpenetrated markets; mobile voice, data, and mobile money services, cost efficiencies, good management and control of its debt profile, the company remains hugely attractive.

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