For all its vastness and economic potential, it is not particularly easy for investors to take direct exposure to companies actively growing in Africa. This is something of a surprise, given the open secret that is the continent’s rapidly growing, youthful population, its swiftly developing economies and swelling ranks of affluent consumers.
One possible route is Airtel Africa, which joined the London stock market at the end of June and went straight into the FTSE 250 midcap index in the subsequent reshuffle in September with a market value that stands at more than £2.6 billion.
Airtel Africa was previously a subsidiary of Bharti Airtel, the Indian telecommunications group, which acquired its operations in 2010 and expanded it during its ownership through a series of follow-on deals.
The company is one of the biggest providers of mobile phone services in Africa, with a presence in 14 countries, the largest of which is Nigeria. The No 1 or No 2 player in each of its chosen markets, the group offers mobile payment services, a small part of its business but fast growing. Its main competitor is MTN Group, a South Africa-based emerging markets telecoms provider.
Airtel Africa came to the market to raise funds to reduce debt that was running at five times its annual profits before tax and other items. It has been cut to a more manageable 2.3 times. It raised $750 million at its listing, when the shares were priced at 80p, the bottom of the previously indicated range of 80p to 100p.
Unfortunately for investors, the shares have never traded above the new issue price. At five times the previous year’s earnings per share, it doesn’t feel as if the shares were priced particularly aggressively.
It appears that Airtel Africa has many of the requisite component parts that should usually tempt investors. Its most recent results, published last month, show clearly it is a growth company, with revenues for the six months to the end of September (assuming constant currencies) and underlying profits growing by double-digit percentages.
The acquisition yesterday of additional mobile phone spectrum in Nigeria underscores potential for growth in countries where it is present, let alone the opportunity to expand into countries such as Ethiopia, which is liberalising its phones network.
The money services offering, designed to cater to a population that operates largely without bank accounts, offers possibilities. It is an area that Airtel Africa is actively developing through partnerships, most recently agreed with Mastercard, Ecobank, a pan-African lender, and Finablr, the payments platform.
Mobile money services account for less than 10 per cent of revenues but it’s hard to imagine this not increasing. The mobiles and money businesses have enviably high underlying profit margins, of 41.8 per cent and 48.2 per cent respectively.
The company gave investors a pleasant surprise at its half-year results, unexpectedly paying an interim dividend of 3 US cents per share, which would have been welcome.
A niggle is that, at about 39 per cent of group revenues, Nigeria is a large part of the Airtel Africa business and it would be preferable to see other countries chip in a greater share of the earnings, though at the same time the company’s largest market arguably shows what the potential is for the rest of them.
The shares, down 3¼p, or 4.8 per cent, to 67¼p yesterday, are valued at just 8.9 times consensus forecast earnings, which surely feels like a bargain for investors prepared to think longer term.
ADVICE Buy
WHY Pure-play Africa-focused growth business with wide expansion opportunities and undervalued share price
De La Rue
A company that prints a sizeable proportion of the world’s banknotes must surely be on the way out because we use cards and phones rather than real money to pay for goods, right?
Try telling that to De La Rue, which makes sterling notes for the Bank of England and euro-denominated notes for central banks on the Continent, among others, and it is — unsurprisingly — quick to argue for the resilience of cash.
The company’s website sprays out statistics including that 84 per cent of the world’s transactions are in cash, that the amount of currency in circulation increases — even in developed markets — at a faster rate than national GDP, that 11 per cent of the population survives on less than $1.90 a day and will always need to have actual money passing through their hands.
The stats are all very well, but it’s a naive investor that fails to spot the long-term trend of an increasingly cashless global economy.
De La Rue has been diversifying into product authentification, security and ID protection, in a tacit acknowledgement that its main market has a limited lifespan.
De la Rue was established in 1821 when Thomas de la Rue set up in London as a printer, stationer and producer of other specialist goods. Employing more than 2,000 staff worldwide, its biggest business is printing bank notes but it is aiming to double its authentication and traceability business to at least 15 per cent of revenues within three years.
The group has several headaches: first, an investigation into allegations of suspected corruption in South Sudan; second, a tranche of blocked payments from Venezuela that have forced it to make an £18.1 million provision; and third, an activist shareholder, Crystal Amber, which wants boardroom change.
Longstanding investors that have endured rows over unawarded passport contracts and, most recently, a profit warning will be hoping that the new management team will use a thorough strategic review to set the company on to a more stable path.
The shares, down 2¼p, or 1.3 per cent, to 168¾p, trade for 10.2 times historical earnings with a yield of 14.8 per cent. They are not appealing.
ADVICE Avoid
WHYBusiness in flux needs to rebuild investor confidence
