We initiate coverage on Airtel Africa Plc (AIRTELAFRI) with a 12-month Target Price (TP) and projected market capitalization of N1,559.44 and N5.9 trillion, respectively. Our TP implies a total return of 27.8% (comprising expected capital appreciation of 24.8% and a dividend yield of 3.1%) and a BUY recommendation on the stock.
Our outlook on the stock is premised on projected improvements in return metrics and consistent with the following: i). The company has three core segments operating in 14 countries with vast macroeconomic potentials, favourable demographic constitution, and rapidly expanding addressable markets; ii). Its targeted markets have mostly good regulatory environments, where authorities appear determined to drive greater financial inclusion through partnerships with fintechs and mobile money operators, an area in which AIRTELAFRI has demonstrable experience. That the company is yet to scratch the surface regarding coverage of the c.40.0 million unbanked Nigerians speaks to the growth potential of its mobile money business; iii). Data is becoming a way of life in Africa, with the rapid acceptance of smart home initiatives and online gaming combined with the COVID-inspired rise in remote engagements across firms, schools, and churches as major fulcrums for data earnings; and iv). AIRTELAFRI has strong positioning across target markets and robust support from an experienced parent company.
Valuation: We deployed a blend of DCF and relative valuation methodologies to arrive at our TP. The DCF methodology resulted in a 12-month equity value of N6.0 trillion for AIRTELAFRI (vs current market cap of N4.7 trillion) and a TP of N1,588.93. The assumptions underlying our DCF include a beta of 1.0, a terminal growth of 3.0%, a cost of equity of 28.0%, and an effective interest rate on debt and finance leases of 7.7%. Our relative valuation was based on comparisons (using EV/EBITDA and PE ratios of select emerging markets and African peers).
Risks to expectations: We have identified three broad categories of risks, namely: 1) currency risk; 2) dividend repatriation risk; 3) regulatory and legal risks. Currency risk can result from inadequate FX, improper price discovery, and multiple exchange rate markets. Similarly, dividend repatriation risk speaks to the lingering difficulty of dividend/income repatriation, particularly from its largest market (Nigeria). Lastly, regulatory and legal risks may arise due to volatile regulatory changes, political instability, and relatively weak legal structures.
