Published on 24/08/2020 1:00:33 PM | Source: Motilal Oswal Financial Services Ltd

Update On Airtel Africa Ltd By Motilal Oswal

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Subdued performance as COVID-19 impacts voice usage

* Weak performance; earnings decline: Reported revenue/EBITDA decreased 5%/6% QoQ to USD851m/USD368m while margins declined 50bp QoQ to 43.2%. On constant currency (CC) basis, revenue/EBITDA declined 1.6%/1.3% QoQ to USD856m/USD377m (below est. 10%/11% – ~6% impact was due to shift in CC rates from Mar’19 to Mar’20). However, margins were up 10bp QoQ to 44%. The revenue decline was led by 4% QoQ ARPU decrease to USD2.6 (v/s USD2.7 in 4QFY20), which was partially offset by 0.8% growth is net subscriber base to 111.5m. Reported PAT was down 26% QoQ to USD57m. In CC terms, it fell 44% QoQ to USD80m, mainly on account of lower revenue and higher taxes of USD61m in 1QFY21 (v/s USD27m in 4QFY20). Airtel Africa’s capex reduced to USD66m in 1QFY21 (v/s USD246m in 4QFY20) due to the lockdown. Subsequently, its operating FCF increased to USD310m (v/s USD136m in 4QFY20).

* Lockdown puts a pause on Nigeria’s growth momentum: Geography-wise, Nigeria which contributes 40% to Airtel Africa’s revenues witnessed 4.5%/8% QoQ decline in revenue/EBITDA (CC terms) to USD343m/USD183m. This was particularly led by decline in voice ARPU as data ARPU stood flat v/s 1.8% subscriber growth. East Africa performed relatively better with revenue/EBITDA growth of 2.3%/8.3% to USD306m/USD130m, mainly driven by data growth. Francophone Africa’s revenue dropped 1.9% QoQ to USD211m while EBITDA grew 5.7% to USD74m. The revenue decline was led by 2.8% ARPU drop while subscriber base stood flat.

* Decline led by voice segment: Across regions, data segment led strong revenue growth of 9% QoQ (CC terms) on the back of increased subscriber base (4.3% to 37m) and growth in ARPU (4.2% to USD2.5). The decline in voice business (-7.7% QoQ) more than offset data growth, as voice ARPU fell 7%. Mobile money saw flat revenue to USD81m as its ARPU declined while subscriber base saw marginal growth.

* Highlights from management commentary: (a) COVID-19 impact: The restriction on movement due to COVID-19 impacted the economy and subsequently affected disposable income and customer usage in Apr’20. However, recovery was witnessed in May-Jun’20, (b) Focus on 4G network expansion: Airtel Africa has 23,471 sites in Africa (~65% sites are on 4G) and ~9,800 sites in Nigeria (~70% sites are on 4G). In three countries (not specified), all sites are on 4G and the company has guided for capex of USD625-650m for expanding 4G coverage in other areas. (c) Airtel Money to drive growth: Mobile money and data are key growth drivers and contribute ~41% of Airtel Africa’s revenue. The two segments are growing at >30% YoY. Mobile money license approval is awaited in Nigeria, which may accelerate growth further.

* Valuation and view: Airtel Africa has a market cap of USD3b and EV (excluding lease obligation) of USD5.2b with an implied EV/EBITDA multiple of 4x/3.7x on FY21E/FY22E EBITDA. Airtel Africa is trading at ~20% discount to other African telcos (MTN and Vodacom). Our SOTP-based TP for Bharti is INR690/share and offers a 23% upside.


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