Airtel: FSDH Cuts Price Target, Cites Short-term Headwind to Growth

Admin 24-Aug-2020 Business

Equity research analysts at FSDH Merchant Bank have cut price target for Airtel Africa stock to ₦448.26 from ₦477.60 following a lower adjustments made to profit lines.

However, in dollar, due to devaluation, the firm downgrades the Telecommunication giant’s stock target price from US$1.33 to US$1.18.

Airtel Africa Plc. in its recently released Q1 2021 (Apr 2019 – Jun 2020) result reported revenue growth of 6.9% year on year to US$851 million (in constant currency terms – 13.0%) from US$796 million in Q1 2020.

The growth in revenue was driven by sustained growth in Data which increased 28.0% to US$265 million and mobile revenue surged 20.0% to US$81 million.Airtel: FSDH Cuts Price Target, Cites Short-term Headwind to Growth

On the flip side, FSDH explained that voice revenue was disappointing, it declined by 3.2% year on year to US$454 million.

However, analysts stated that the decline in voice revenue was largely driven by devaluation of currencies in key markets like Nigeria, Zambia and Kenya.


In constant currency terms, voice revenue grew by 2.2% year on year.

The growth in revenue was further underpinned by an increase in Airtel Africa’s voice subscribers’ base which increased by 11.8% year on year to 111.5 million subscribers while data subscriber base grew 23.2% to 37 million subscribers.

In addition, data revenue was particularly driven by increased data usage as data traffic grew by 100.7% while mobile money revenue growth was driven by increased transaction value (up 33.9%) processed via Airtel’s mobile money platforms.

FSDH however noted that the company provided free SMS for subscribers as well as free mobile money transactions as part of palliative contributions during the covid-19 pandemic, thus slowed revenue growth.

In expressing their views, analysts held that Airtel Africa reported sub-inflationary growth in operating expenses, which climbed higher by 5.7% to US$483 million in Q1 from US$457 million in the comparable period.

The increase in operating expenses was driven by increases in network operating expenses (10.6%), Employee benefits (30.0%), Sales & Marketing expenses (5.3%) and License Fee/Spectrum usage charges (4.3%).

FSDH noted that the increase in operating expenses was below Q1 2021 revenue growth.

Against this backdrop, the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) expanded 8.2% to US$371 million in Q1 2021 from US$343 in Q1 2020 while EBITDA margin strengthened by 0.5 percentage points year on year to 43.6%.

In addition, analysts stated that depreciation & amortisation charges rose by 2.5% year on year to US$161 million.

FSDH stated that consequently, operating profit printed a sturdy 12.9% increase to US$210 million in Q1 2021 from US$186 million in Q1 2020.

Meanwhile, the company’s net finance cost edged higher by 8.8% to US$99 million in Q1 2021 from US$91 million in Q1 2020.

Analysts explained that the decrease in net finance cost was primarily driven by lower finance income (down 87.5%) due to the lower yield environment as finance cost declined by 5.6%.

“We note that Airtel Africa’s debt position sustained its improvement as net debt to EBITDA printed at 2.2x at the end of Q1 2021 compared to 3.0x at the end of Q1 2020”, FSDH stated.

Airtel Africa did not book any non-operational income as against the US$72 million booked in Q1 2020.

As a result, pre-tax profit slumped 33.5% year on year to US$111 million in Q1 2021 from US$167 million in Q1 2020.

Excluding the non-recurring income, pre-tax profit would be up 16.8% year on year, with effective tax rate in Q1 2021 printed at 48.6% as against 21.0% in Q1 2020.

Thus, the Telecom firm’s tax expense jumped by 54.3% to US$54 million in Q1 2021.

FSDH said this placed significant pressure on net income which plunged 56.8% year on year to US$57 million from US$132 million in the comparable period.

As profit declined, Airtel Africa’s earnings per share settled at 1.12 cents for Q1 2021 as against 4.06 cents in Q1 2020.


FSDH noted that negative tax surprise derails short-term outlook but long-term prospects remain solid.

“We cut our revenue forecast lower to US$3.7 billion reflecting reduced optimism on voice traffic growth”, the firm stated in the equity note.

However, FSDH explained that despite the revenue cut, its forecast implies an 8.4% year on year increase over 2020 forecast.

“We remain very bullish on business prospects for data and mobile money”, FSDH stated.

For data revenue, analysts stated that the company earlier had acquired more spectrum in Nigeria, Tanzania and Malawi.

Breaking down its optimistic stance on Airtel Africa, FSDH stated that the Telecom giant has acquired additional spectrum (10MHz in the 2600 band) in Malawi.

“Our optimism on data revenue reflects in our 21.3% forecast growth for the income line. For mobile money, we forecast a 12.7% growth on sustained initiatives to drive transaction growth on Airtel mobile money channels”, FSDH stated.

Recalled that Airtel Africa recently announced new partnerships with Mukuru & World Remit in July to drive cross border transfers into Airtel Money customer wallets.

“We expect voice revenue to recover during the rest of the year as economic activities continue to open up across different countries.

“However, we expect the growth to remain weak as reflected in our 1.2% year on year forecast to US$2.0 billion”, FSDH explained.

Analysts said Airtel Africa’s operating expenses growth remains lower than revenue growth and they expect it to follow recent trend despite the inflationary pressures in the countries it operates.

As a result, FSDH forecasts that EBITDA and operating profit would grow by 6.4% and 9.7% year on year.

“We note that Airtel Africa’s profit growth has come under pressure from previously recorded non-recurring operating income as well as higher tax expense.

“However, we expect pre-tax profit to recover in subsequent quarters as the impact of the high base caused by non-recurring income fades.

“Overall, we forecast pre-tax profit to grow by 9.5% year on year to US$655 million”, FSDH stated in the equity research note.

That said, the firm reckoned that the negative surprise in effective tax rate serves as a downside risk to net income.

“We model an effective tax rate of 45.0% as against 32.0% previously”, analysts said.

Consequently, FSDH forecasted an 11.7% year on year decline in net income to US$360 million.

FSDH the lower earnings per share (EPS) forecast to 8.63cents from 12.94cents previously.

The investment firm stated that following lower adjustments made to profit lines, it also lower target price from US$1.33/s (or N477.60/s) to US$1.18/s (or N448.26/s).

Analysts also recognised that the slower decline in target price adjustment in Naira relative to the USD adjustment reflects the recent devaluation of the naira.

“We note the stock has gained 27.1% since our last communication largely due to demand by foreign portfolio investors who needed to repatriate funds outside the country due to FX illiquidity.

“That said, the recent rally caps the potential upside on the stock to 18.0%.

“However, we retain our BUY rating on the stock as it trades at an enterprise value (EV) to EBITDA multiple of 3.74x which is a 25.2% to our peer average of 5.0x.

“While we see short-term headwinds to growth, we remain confident in the company’s long-term prospect as we consider current drags temporary”, FSDH explained.

Airtel: FSDH Cuts Price Target, Cites Short-term Headwind to Growth by Julius Alagbe. 

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