Airtel Nigeria Ltd has opened its much awaited Initial Public Offering in Nigeria. The third largest telecommunications company in Nigeria by subscriber base announced a few weeks back that it planned a dual listing of its stock on the Nigerian and London Stock Exchanges respectively.
The company wants to raise anything between N200 billion to N325 billion from investors. As expected, investors are inquisitive about this latest offer from a telco and will like to know if this is a buy.
Airtel Africa – Airtel Africa is a subsidiary of Indian owned Bharti Airtel which owns 65% of the company. The African entity operates in 14 countries which have a total population of 563 million as of 2018.
- The countries were they currently operate from are Congo B, Nigeria, Rwanda, Uganda, Zambia, DRC, Kenya, Madagascar, Niger, Chad, and Tanzania Gabon, Niger and Seychelles.
- The Group’s largest markets are Nigeria, Uganda, DRC, Zambia, Tanzania, and Kenya. Airtel currently doesn’t operate in South Africa.
- Airtel Africa is the company currently listing its shares.
Nigerian Airtel: As expected, Nigeria is by far the largest market for Airtel and the most lucrative of the lot.
- According to its prospectus, Nigeria represents the Group’s largest single country subscriber base, comprising 37.6% of the Group’s total subscribers as at 31 March 2019, with 43.4% of subscribers in East Africa and the remaining 19.1% in the Group’s Rest of Africa segment.
- In the year ended 31 March 2019, revenue in Nigeria was US$1.1 billion (representing 35.9% of the Group’s revenue in the year) and Underlying EBITDA was US$550 million.
- In Nigeria, revenue attributable to mobile voice services in the year ended 31 March 2019 was US$739.8 million
Why is Airtel raising money – From what we read in its prospectus, the company wants to raise money so it can use it to pay down some of its crushing debts.
- A cursory analysis of Airtel’s books shows it owes about $3.5 billion in external debts.
- The company also owes another $1.1 billion in finance leases. These are not necessary loans but assets leased by Airtel which it uses for its operations.
- Airtel’s debt is about twice its equity compared to MTN whose debt is 3 times its equity. Most GSM telcos operate with high debt ratios. What is important is whether they can generate enough cash flows (EBITDA) to cover the debt.
- Airtel claims its leverage ratio (debt over cash flows) of 3x. This is extremely high compared to MTN’s 0.4x. Meaning MTN generates significantly more cash flows that can cover its debt compared to Airtel.
- Airtel hopes the cash generated from the IPO will help bring down its leverage ratio to under 2.5x.
Is Airtel Making Money? Investors in telecommunication firms like to look at Ebita Margins to determine if a company is “making money”. They believe more in the company’s ability to generate cash flows rather than profits.
- Airtel reported revenues of $3 billion for the year ended March 2019 compared to $2.9 billion the year before. The company also reported a profit of $450 million in 2019.
- Airtel posted losses of $134 million and $769 million in 2016 and 2017 respectively. We don’t believe it currently has profits you can distribute as a dividend.
- Airtel has an Ebitda of about $1.3 billion and Ebitda margin of 43%. This is quite strong especially when you compare to MTN’s (Nigeria) Ebitda margin of 44%.
What price? The company claims it has started a book building which is basically a method that allows investors to determine the target price. However, Airtel claims it wants to target between N363 – N454 per ordinary share.
Is the value worth it? Airtel’s earnings per share for the year ended March 2019 was 21 cents ($0.21) It’s highest target price of N454 ($1.26) gives us a price-earnings multiple of 6x. This is cheap when compared to MTN Nigeria. However, by the time you add the new shares, it will issue after IPO the price could rise to 9x multiple.
Is this offer for me? Airtel clearly has institutional investors as its target buyers. If you are a retail investor with thousands of naira to invest here then look elsewhere. Airtel states clearly;
“The Offer consists of an institutional offer only. Ordinary Shares will be offered pursuant to the Global Offer (a) to certain institutional investors in the United Kingdom and elsewhere outside the United States in reliance on Regulation S, (b) in the United States only to those reasonably believed to be QIBs in reliance on an exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act and pursuant to the Nigerian Offer (c) in Nigeria to Qualified Institutional Investors and High Net Worth Investors as defined in Rule 321 of the Nigerian SEC Rules pursuant to a book building process (the “Nigerian Offer”).”
Thus if you are not an institutional investor or HNI then this is not for you.
Offer timetable is as follows;
- Announcement of Offer Price, Offer Size, publication of the Pricing Statement and allocation of Ordinary Shares – June 28, 2019
- Allot new Ordinary Shares to the shareholders – June 29, 2019
- Crediting of Ordinary Shares to accounts – July 3, 2019
- Nigerian Admission and start of unconditional dealings on The Nigerian Stock Exchange – July 4, 2019