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Business has been strong lately at telecoms company Airtel Africa (LSE: AAF). But, even after a rise of around 5% in early trading today (30 October), Airtel Africa shares remain about 10% lower than in the middle of last month. Longer term though, they are up 74% since their 2019 listing.
What has been going on – and does this offer a buying opportunity for my portfolio?
Strong customer demand growth
The reason for today’s positive start was the release of the firm’s interim results.
They showed strong growth in customer demand. Compared to the same period last year, the Africa-focused company grew its total customer base by almost 10%. It saw increased usage across voice, data and mobile money.
Indeed, mobile money proved its role as a growth rocket for the firm. It grew 45.3% in constancy currency terms.
Based on the most recent quarter, the company now expects annualised mobile money transaction value to be a whopping $116bn, although of course the fees it earns will only be a small slice of that revenue.
Key political risk of exchange rate shifts
But hang on a moment.
Why do the results repeatedly emphasise the difference between performance as reported in constant currency and reported currency terms?
The reported currency results are what actually happened. Constant currency reporting reflects what would have happened if exchange rates did not move about.
That is a common accounting practice for companies that earn revenues in a range of currencies. But currency impacts are real – and as Airtel Africa’s first half shows, can be painful.
Revenue on a constant currency basis surged 19.7%, yet the reported growth was a far more modest 2.3%. Earnings before interest, tax, depreciation and amortisation (EBITDA) were up 21.2% on a constant currency basis — but only 3.7% as actually reported.
The main culprit for those large variations was the plummeting value of the local currency in Nigeria, a key market for the business. Worries about that help explain why the shares have fallen in recent weeks.
Why I continue to own these shares
Those exchange rate risks are a key consideration when weighing up the appeal of Airtel Africa shares. The firm’s focus on developing markets entails sizeable political risk, although within Africa it operates in multiple markets that do not all face the same scale of economic or political challenges.
Meanwhile, the results look impressive to me and underline the strong ongoing growth opportunities here. Even taking those huge currency movements into account, revenue and EBITDA grew compared to the same period last year. So did operating free cash flow. Net debt inched up, but only by 1%.
The board’s confidence in the business was reflected in a 9% increase in the interim dividend.
There are clear, ongoing risks that could drag down the price of Airtel Africa shares. Exchange rate movements are outside the firm’s control but can affect its financial performance significantly.
However, strong customer growth, booming demand for mobile money and expected long-term growth in market size are all working in its favour.
With an eye on managing risk and keeping my portfolio diversified, I will hold my Airtel Africa shares without buying any more for now. But if I held none, I would happily buy some today.
