Recently, a new stock was added to the FTSE 100 index – Airtel Africa (LSE: AAF). It’s a UK-based telecommunications company that operates in Africa.
Here, I’m going to take a look at the investment case for Airtel Africa shares. Should I buy the stock for my portfolio?
Airtel Africa shares: an analysis
Whenever I’m analysing a company from a long-term investment perspective, I run it through a five-point checklist:
- The market it operates in. Is it set for long-term growth?
- The company’s position in its industry. Is it a leader with a competitive advantage?
- Financials. Does it have a strong balance sheet and a high level of profitability?
- Valuation. Is it trading at a reasonable price?
- Risks. What could go wrong?
This checklist helps me identify high-quality businesses with long-term growth potential. So let’s run Airtel Africa through the list and see how it fares.
Market
In terms of the market the company operates in, I’m happy with the growth potential. Airtel operates in 14 countries across Africa including Nigeria, Kenya, and the Democratic Republic of the Congo. These countries are generally experiencing high population growth and increasing demand for mobile services. Meanwhile, mobile penetration across Sub-Saharan Africa remains quite low. Overall, I’m comfortable with the market’s growth potential.
Competitive advantage
What about the company’s industry position though? Well, while Airtel has a substantial user base (around 125m), it does face plenty of competition from rivals such as MTN, Vodacom, and Orange.
MTN is the largest telecommunications provider in Africa (it has around 270m users across Africa and the Middle East), and it has a more powerful brand, according to my research. This adds a bit of risk to my mind. At this stage, I’m not seeing a clear competitive advantage here.
Financials
As for the company’s financials, they look pretty solid to me. For starters, the company is generating consistent growth. Between FY2017 and FY2021, revenue climbed from $2.9bn to $3.9bn. For FY2022, analysts expect revenue of $4.7bn.
Secondly, Airtel is profitable. Last year, return on capital employed was 17%. The company also pays a dividend.
One issue however, is that debt is a little high. At the end of September, the group had long-term debt of nearly $3bn, versus equity of around $3.6bn. Again, that adds risk.
Valuation
Moving on to the valuation, this seems quite reasonable to me. At present, analysts expect the group to generate earnings per share of 18.2 cents for the year ending 31 March 2023. That puts the stock on a forward-looking P/E ratio of 10.1
That’s a low valuation. That said, I’m concerned it could be too low. Is that the market’s way of telling me there are big risks here?
Risks
As for the risks, there are a few that are worth mentioning. One is the potential for adverse actions from the governments of the countries Airtel operates in. For example, the nationalisation of telecommunication assets.
Another is the potential for political or macroeconomic turbulence in the company’s main markets. Emerging market economies can be significantly more volatile than developed economies.
Airtel Africa shares: my move now
Putting this all together, my conclusion is that Airtel Africa is not a buy for me right now. I do think the company looks interesting. However, given the risks, I think there are better stocks to buy today.