A drive along any of the many bridges in Lagos reveals quite a lot about the changes skyline of the commercial nerve center of Nigeria. Like its counterparts around the world, the skyline is typified by flyovers, bridges, industrial pollution and off course towers. Some of the towers are usually office and apartment buildings 4 to 20 story high with just a couple exceeding 30 floors. Nowadays though, a different kind of tower exist that is fast becoming a common scenery in the skyline of the city of Lagos and indeed Nigeria. It’s Telecommunication Towers! Nigeria has over 20,000 of them and counting.
All of this point to a massive investment in infrastructural by most telecom companies who spend money building this towers, maintaining them or even outsourcing them. It’s a multi billion naira business which is why companies like IHS Nigeria Plc deserve a look-in when financial results are announced. The company is one of the leading collocation provider in Nigeria as those into the business of renting and maintaining tower masts and cell sites are known. In the last couple of years IHS has moved from merely just building and managing cell sites for operators to owning and leasing them to operators. The company has acquired over 700 towers in the last two years and recently just signed a deal with MTN to acquire about 1,758 mobile network towers across several West African Countries. A deal that is set to worth about $284million. This radical change in business model comes with its own consequences. It requires huge financial outlay and will involve years of incurring high operational expenses before the expected increase in shareholder value begin to materialize.
That requires a lot patience, the kind that private equity firms and even conservative investors like IFC wouldn’t mind having. IFC invested about $80million in the company in 2011 and just this October, Wendel a private equity firm took up a 25% stake in the company, a deal worth about $125million. The company also boast of other strategic shareholders such as Investec, Emerging Capital Partners, Dutch Development Bank and even Skye Bank. All have significant stake in the N25billion Net Assets the company owns. As expected the investments will be used to acquire more towers, invest in solar powered technologies which will be used to power cell sites etc.
Presently though and as a consequence of such patient build up of resources, the bottom line of the company is bleeding red. At its financial year ending April 2012, it made a pre-tax loss of N2.8billion. This is on the back of a prior loss of N1.8b in 2011wiping out the N3.2billion cumulative profit it made in the four years leading to 2010. Their Chairman, Mallam BA El Rufai, explained that their shift to collocation “has smaller turnover than managed services but a higher profit margin”. That is yet to be seen as margins has continued to dip. Operating profit margin for example was -5.3% at the end of financial year 2012. In the first quarter result released last week, operating profit margin was -11.8%. Most of the expenses came from depreciation as most asset leasing businesses should expect. In the year ended April 2012 (which it began massive acquisition of towers) the company expensed N2.4b as depreciation compared to N52om in the prior year. The first quarter results show a depreciation of N723m alone a sign that depreciation may top N3b this year as they continue to acquire more towers.
Truth be told, the new business model does have strong potentials to turn the company into a money making machine. By acquiring more and more towers and investing in technology that will result in cheap running cost, they will soon become the leading, and mostly single largest supplier of telecommunication infrastructure in a fast growing West African telecoms market. Imagine owning all the office buildings in West Africa and letting them out to multi nationals who have no choice but to pay lease rentals. Private Equity firms see this as a major economic advantage and know in just a matter of time bottom line may soon turn and possibly remain black. The market though is a lot less bullish with its share price currently trading at N2.25. It’s better than its worst showing in mid june this year at N2.13. But that won’t worry management, less than 10% of its shares are owned by the public so there is no pressure to pay dividend soon and certainly no threat on massive dumping of its shares. For now though, lets just keep buying towers even if losses rise in tandem.