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.
MTN Nigeria’s H1 2023 numbers were buoyed largely by double-digit growth in voice (12.1% y/y to N562.6bn) and data revenue (+34.9% y/y to N470bn), amidst inflationary growth in Operating Expenses (+18.8% y/y to N267.3bn). A net FX loss of N131.5bn contributed significantly to the decline witnessed in Pre-tax Profit, which declined by 25.4% y/y to N200.3bn in H1 2023 from N268.6bn in H1 2022.
Despite the smuggling-induced volume and price weaknesses in the first half of the year, we leave our FY'23 top-line expectation for OKOMU unchanged at N83.24 billion. This optimism is hinged on the expected impact of the over 13.7%-naira depreciation at the parallel market between June 2023 and August 2023 (or weaker 27.9% YoY), which should support local CPO prices in H2'23. We, however, lower our earnings expectation due to the likely sustenance of inflation-induced margin pressures in FY'23.
Navigating African LCY sovereign credits has been challenging, with subpar performances predominant in the earlier part of the year. However, financing conditions are improving, inspired by softer inflation in the developed market. For context, US inflation rose at its slowest pace in more than two years in June, reinforcing the views that the US Fed is nearing the end of the current interest rate-hiking cycle. The cooling inflation has also accelerated a decline in the dollar (-1.3% YtD), with potential positive pass-through to African LCY credits.
The negative impacts of a weaker currency and stubbornly-high inflation will likely worsen in the second half of 2023. The naira devaluation at the I&E window that trailed the monetary policy reforms could drive the costs of imported raw materials higher and stoke material foreign exchange losses. In addition, even though most consumers are insulated from the impact of the depreciation at the I&E (as they mostly access FX at the parallel market), the combined impact of subsidy removal and the potential increase in electricity tariffs suggests that discretionary income could become weaker. Notwithstanding, the ongoing moderation in select commodity prices and companies' strategic responses could act as offsets
Despite initial optimism surrounding growth projections for 2023, the first half of the year witnessed significant disruptions to global growth recovery driven by volatility in food and energy prices, the imposition of trade barriers, supply chain disruptions stemming from regional conflicts, and the labour market imbalances leading to slower economic activity. These developments have introduced a heightened sense of uncertainty in the global economic landscape, impacting trade, investment, and consumer confidence. Considering current realities, the IMF in its April 2023 World Economic Outlook (WEO) report downgraded its global growth projection for the year by 60 bps to 2.8% (2022: 3.4%).
