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In the ever-evolving telecommunications landscape, Airtel Africa (LSE:AAF) stands out as a potentially undervalued gem in the FTSE 100 IndexThis telecom company really catches my eye and some analysis suggests it could be trading at a significant discount. I've been a fan of this company for a long time, so is there still more growth ahead?
Growing market
The company offers telecommunications and mobile money services in 14 African countries, with a particular focus on Nigeria, East Africa and Francophone Africa. It has positioned itself at the forefront of the continent’s digital revolution, offering a range of services spanning from basic 2G to advanced 5G networks, along with innovative mobile money solutions. With rapidly growing populations in these areas and a high demand for technology, the company looks set to take advantage.
The numbers
The company’s financial performance has been strong, with revenues over the last 12 months (TTM) reaching £3.95 billion. Despite a challenging year for many in the telecoms sector, the company has outperformed both its industry peers and the wider UK market, returning 9% over the past year compared to 3.9% for the UK wireless telecoms industry and 6.3% for the UK market. Not exactly groundbreaking, but in a sector with reliable growth, strong forecasts and an experienced management team, it interests me.
Ratings
What makes this an investment particularly interesting is the potential undervaluation of the stock. According to a discounted cash flow (DCF) calculation, the stock is trading at a staggering 67.9% below the estimated fair value. There is also much to appreciate when looking at the details behind this, with earnings growth projected at 39.77% per year, significantly above the market average. This projection is supported by increasing mobile phone penetration and data usage in Africa.
I'm also a big fan of other metrics that investors tend to pay attention to for these types of companies, with a price-to-sales (P/S) ratio of 1.1 times suggesting that the company is well-priced compared to its peers and the industry at large.
Risks
While the case for investment is compelling, it is critical to consider the risks. The debt-to-equity ratio of 103.2% indicates a significant debt burden, which could limit financial flexibility. I also have some concerns about the recent results, which show a loss of £130.50m and a negative net profit margin of 3.3%. There are clearly challenges in translating revenue growth into net profit.
The dependence of companies on emerging markets also worries me a bit. Such an investment always carries inherent risks, including sudden regulatory changes, currency fluctuations and political instability.
Next steps
Despite these challenges, the company’s strong market position, impressive projections and apparent undervaluation make it an interesting prospect. The focus on mobile money services and expanding data usage aligns well with the ongoing digital transformation in Africa. As internet penetration and smartphone adoption continue to increase, Airtel Africa is well positioned to capitalise on these trends.
As a long-term investor with a relatively high risk tolerance, I see a lot of potential here. If the company can continue to perform well and capture market share in a growing sector, there could be real growth in the coming decades. As a result, I will add to my position at the next opportunity.
