Airtel Africa: Impressive Performance Peppered by Increased Costs
Airtel Africa Plc reported impressive revenue performance dented strongly by increased finance costs, higher tax payments, and lower tax credits in the first half earnings release. In the period, the second largest telecom giant in Nigeria reported about a 36% year-on-year drop in after-tax profit to ₦55.97 billion from ₦88.39 billion a year ago.
As indicated, this tail-off in earnings was largely driven by an increase recorded in operating expenses, lower tax credits, and higher finance costs which spiked strongly in the period.The management said excluding benefit of exceptional items and one-off derivative gain of $46 million in the prior period, profit after tax would have increased by 31.8%.
A look into the telecom company’s financials indicates that its management is leveraging on borrowed funds strongly.
This resulted in increased interest cost payments in the year, thus pushing net finance cost above the prior year. The company’s network operating expenses rose 11.11% from ₦114.64 billion to ₦127.38 billion at the end of the first half of 2021.
Again, other operating expenses line rose 6.47% from ₦370.17 billion to ₦394.11 billion year on year. Pressure on revenue was aggravated by Airtel Africa’s capital structure which largely tilted to the use of debt finance.
In the first half of 2021 result, the Telecom giant’s net finance cost increased 29.73% from ₦57.13 billion to ₦74.11 billion.
Airtel Africa however stated that $43 million increase in net finance costs was driven by higher other finance costs which more than offset the reduced interest costs of $8.7 million due to lower debt.
In the report, the directors stated that the increase in other finance costs was primarily driven by $46m of derivative gains which occurred in the comparable period in the prior year.
In the half-year result, total tax charges for the period amounted to $136 million as compared to $88m in the comparable period last year. Airtel Africa explained that this was due to higher operating profit and withholding tax on operating company dividends.
The telecom firm’s H1-2020 benefited from higher deferred tax credit recognition of $27 million as compared to $9.6 million in H1-2021. Driven by increased cash position, Airtel Africa’s total assets expanded 3% to ₦3.710 trillion from ₦3.599 trillion at the beginning of the financial period.
Cash and bank balances actually lifted 10.98% to settle at ₦561.63 billion from ₦506.05 billion. Equity analysts at Meristem Securities Limited noted that Airtel Africa’s financial performance was broadly positive and in line with analysts’ expectations.
There is a comparatively stronger revenue performance in the second quarter (+14.22%) that lifted overall revenue growth in the first half to 10.67%. In the period, Airtel Africa’s revenue settled at USD1.81 billion or ₦700.59 billion in naira term.
Basically, Airtel’s topline growth reflected strong performance across its operating subsidiaries in Nigeria with +20.20% growth, East Africa delivered a +21.90 % upsurge and Francophone Africa +4.40% year on year.
Meristem Securities said if the impact of currency devaluation from Nigeria (6.50%), Zambia (51.00%) and Kenya (4.50%) were excluded, group-wide revenue growth would have been reported at 16.40% year on year.
The financial statement showed that Airtel’s revenue performance was supported by improved operating metrics during the period. As an example, customer growth was reported at 12.02% year on year with net customer additions of 12.49 million.
Meanwhile, Meristem explained that the Telcos Company’s average revenue per user (ARPU) inched higher by 6.80% year on year to USD2.80 per month. Data and mobile money are poised to lead revenue growth, analysts stated.
In the period, it was noted 26.276% year-on-year improvements were recorded in data revenue for the period. Analysts at Meristem attributed this to the increased demand for data, following the outbreak of the COVID-19 pandemic, and higher smartphone penetration in its operating markets.
“This was evident in the improved volume of data usage per customer (to 2.5GB, from 1.6GB in 2019), while Data ARPU increased by 10.10% to USD2.50 per month”, Meristem said.
The investment firm explained that the outlook for data demand is positive, which bodes well for data revenue growth in subsequent periods.
“We also expect this to be supported by the company’s continued expansion of its 4G network capacity”, it added. Along with the data segment performance, Meristem Securities highlighted the marked improvement in the company’s mobile money segment.
Explaining further in its equity note, Meristem Securities said Airtel processed mobile money transactions worth a cumulative total of USD20.68 billion in H1:2021. This translates to 45.67% year-on-year growth when compared with USD14.19 billion transactions processed in H1:2020.
As such, mobile money revenue surged by 24.30% year on year to USD181 million. “We like that the company has continued to expand its mobile money ecosystem, announcing new partnerships with Standard Chartered Bank, Mukuru, WorldRemit and MoneyGram.
“We expect this to deliver additional value to customers which would lead to improved mobile money revenue growth in subsequent periods”, Meristem Securities noted.
In sum, the investment firm sets revenue projections for 2021 to USD3.88 billion which means an uptick of +12.77% year on year, driven largely by analysts’ expectations for data revenue and mobile money revenue growth.
Though Airtel Africa’s operating and financial performance comes with some excitement, there were one-off exceptional items that dragged the bottom line lower. The telecom giant’s operating profit for the period advanced by 19.49% to USD 472 million, aided by improved cost management.
The financial statement showed that free cash flow generated during the period also witnessed a strong growth of 52.00% to USD319 million. This was due to improved earnings before interest tax depreciation and amortisation (EBITDA) growth (+USD92mn), lower capex (+USD31mn) and positive cash flows from working capital (+USD30mn) which were slightly offset by higher cash taxes (- USD49mn).
“We however highlight that pre and post-tax profits for the period were significantly lower, at USD281 million and USD145mn respectively”, analysts said. This translates to 11.36% and 36.68% year-on-year decline in the bottom line due to one-off exceptional items (+USD72mn) and derivative gains (+USD46mn) recognized in the prior period.
Airtel explained that its profit after tax plunged largely as a result of the recognition in the prior year of a one-off gain of $72m related to the expired indemnity to certain pre-IPO investors, as well as higher finance costs and tax in the current period.
“Excluding benefit of exceptional items and one-off derivative gain of $46 million in the prior period, profit after tax has increased by 31.8%”, the firm explained. Furthermore, analysts highlighted the company’s new progressive dividend policy which aims to grow declared dividends annually by a mid to high single-digit percentage, from a base of USD0.04c per share for 2021.
“We understand that this will be sustained until its reported net debt to EBITDA ratio falls below 2.0x”, Meristem Securities stated.
Analysts at the firm said they expect EBITDA to settle at USD1.68 billion or ₦649.56 billion, represents a +9.77% year-on-year uptick and adopted a target enterprise value (EV) to EBITDA ratio of 4.75x.
After adjusting for its net debt of USD3.09 billion or ₦1.12 trillion, Meristem Securities arrived at a target price of ₦503.00. This translates to an upside potential of 22.62% from its current price, hence analysts at Meristem Securities advised investors to BUY the counter.
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