Airtel Africa (LSE: AAF) is a leading provider of telecommunications services, operating across Africa. The company generates revenue through three sources: mobile voice, data services, and mobile money services. Recent share price appreciation means that the stock is now included in the FTSE 100, therefore I believe it’s a great time for me to increase my holding.
Africa’s telecommunications industry is set to expand rapidly in the future. Analysts agree that the market is projected to have a 10.1% cyclically adjusted growth rate over the next five years, and with smartphone affordability rising, Airtel should be at the forefront of this growth. Taking Africa’s most populated country, Nigeria, as an example, mobile internet users are expected to grow to 65% by 2025. There is clear scope for huge growth here.
Business model
Airtel’s main source of revenue comes from mobile telecommunication services to its mobile subscribers. However, its second and most exciting source of revenue comes in the form of ‘Airtel Money’, which currently accounts for 10% of revenue. This service essentially offers all the benefits of a bank account to its customers — for example, sending and receiving money, paying for goods, deposit and withdrawal of funds — much the same as PayPal.
Airtel Money is booming. Its Average Revenue Per User has risen 15% in the nine months to December 2021, with just 25m of its 125.8m customers using the Airtel Money segment. The opportunity is huge for this business due to the lack of competition in each region, and the ability to cross-sell its mobile money services to its customers. Airtel also has partnerships with Samsung to continue to generate new innovative products for its customers. This is also a high-margin side to its business, helping to boost free cash flow – which can be returned to shareholders via research and development, debt reduction, share buybacks or dividends.
Valuation
The revenue streams identified above have proven extremely successful thus far. The company has posted 16 consecutive quarters of double-digit revenue growth to December 2021. With this strength continuing through a global pandemic, this shows the company’s reliable cash flows and exciting future prospects. Although Airtel Africa is an increasingly profitable company, it trades at 10x next year’s earnings, compared to an industry average of 19x. Much of the African population does not have access to bank accounts and Airtel Money eliminates the need for one, therefore providing a huge catalyst for further earnings growth and a rapid rerating for the company. The company also offers a dividend yield of 3%, which is attractive for a high-growth company.
Great prospects
Urbanisation in Africa is increasing as more educated individuals move to bigger towns and cities in search of work. This will increase the need for telecommunications companies to facilitate the activities of an increasingly prosperous continent. The huge spending by Western nations has led to an inflationary environment. In this ‘new normal’, companies with real assets and reliable cash flows should be favoured over technology companies with high prospects and no profit. Therefore, I believe Airtel Africa is a lower-risk alternative to profit from the future of technology and 5G for my portfolio.