Are you worried about there being a controlling shareholder which owns 57% of the company, thereby reducing minority shareholder protections and the ability for minority shareholders to influence company decision-making?
Interesting write up thanks for sharing. I have been trying to figure airtel africa out for a while and I have held off due to a few risks not dealt with here. I would be interested in hearing what you think
- The low returns on capital employed and high capital intensity of the business may make it difficult to have the long term growth story you outline. Cell network growth is limited by the quality of the internet speed for people using the network due to the limited bandwidth available to go around. Kind of like how the busier a gym gets the worse it is for customers. In theory yes the increasing populations and rising demand for connectivity is a huge untapped demand but in order to service those customers you will need to build new broadcasting infrastructure.
This is extremely expensive and the industry has very high variable costs in serving more customers. I believe Airtel's wacc is 5-6% and returns on capital are 8% that's only a 3% cushion of cost increases that the business becomes value destructive. Most often telecomms companies have to issue lots of debt to raise the money to fund infrastructure expansion/upkeep rather reinvesting earnings the way that more capital light businesses can
- The company is also very sensitive to rising interest rates, it currently pays around 30% it operating profit in interest costs, if the cost of debt rises margins will shrink and the previous issues will get worse
- Mobile internet is a commodity industry and I wasn't able to figure out the industry dynamics on pricing across all the markets they trade in. competition and a race to the bottom on price could sink the whole industry if the other players aren't rational. Like the US Airline Industry
- Given the jurisdictions the company operates in and the necessity for large infrastructure providers to be heavily involved with governments regime's that have relatively very high levels of corruption to gain planning permission, there is a non negligible chance of significant corruption scandal sinking the company out of the blue. I found it too hard to put a probability on this risk
These were the things the have kept me away so far but would be keen to get your thoughts as if all these risks fail to materialise or my reading of the economics of the business are wrong it could be a great opportunity!
With Airtel, there is obvious risk involved but at the current price, the reward far outweighs what risk that might come true or not. In terms of investment, most of it is funded by their cash flow and they have recently increased their capex to help with 4 and 5 G infrastructure and their mobile money platform. Even if they do take on debt airtel has a history of deleveraging quickly. In my view what you said above is not something I am concerned about too much. I am comfortable letting this play out because it's the nature of the industry. I still believe Airtel is well-positioned to do well and I don't see those things that you highlighted as something I am that worried about. One last thing Airtel has a very large market share in many of the countries they operate in and I don't think it is easy for anyone to just come into the market because you still have to understand the consumer habits and its very difficult to understand that if you are a foreign business coming in. Airtel understand their market very well more than anyone and that is why they have seen rapid growth in all their segment.
Are you worried about there being a controlling shareholder which owns 57% of the company, thereby reducing minority shareholder protections and the ability for minority shareholders to influence company decision-making?
No I’m not worried if I’m honest
Have you updated your investment thesis at this price after 2 years or do you think airtel it is still a buy?
I haven’t updated anything because I still hold the company and nothing has changed. Airtel is having a tough time because of the currency difference
Interesting write up thanks for sharing. I have been trying to figure airtel africa out for a while and I have held off due to a few risks not dealt with here. I would be interested in hearing what you think
- The low returns on capital employed and high capital intensity of the business may make it difficult to have the long term growth story you outline. Cell network growth is limited by the quality of the internet speed for people using the network due to the limited bandwidth available to go around. Kind of like how the busier a gym gets the worse it is for customers. In theory yes the increasing populations and rising demand for connectivity is a huge untapped demand but in order to service those customers you will need to build new broadcasting infrastructure.
This is extremely expensive and the industry has very high variable costs in serving more customers. I believe Airtel's wacc is 5-6% and returns on capital are 8% that's only a 3% cushion of cost increases that the business becomes value destructive. Most often telecomms companies have to issue lots of debt to raise the money to fund infrastructure expansion/upkeep rather reinvesting earnings the way that more capital light businesses can
- The company is also very sensitive to rising interest rates, it currently pays around 30% it operating profit in interest costs, if the cost of debt rises margins will shrink and the previous issues will get worse
- Mobile internet is a commodity industry and I wasn't able to figure out the industry dynamics on pricing across all the markets they trade in. competition and a race to the bottom on price could sink the whole industry if the other players aren't rational. Like the US Airline Industry
- Given the jurisdictions the company operates in and the necessity for large infrastructure providers to be heavily involved with governments regime's that have relatively very high levels of corruption to gain planning permission, there is a non negligible chance of significant corruption scandal sinking the company out of the blue. I found it too hard to put a probability on this risk
These were the things the have kept me away so far but would be keen to get your thoughts as if all these risks fail to materialise or my reading of the economics of the business are wrong it could be a great opportunity!
Cheers
With Airtel, there is obvious risk involved but at the current price, the reward far outweighs what risk that might come true or not. In terms of investment, most of it is funded by their cash flow and they have recently increased their capex to help with 4 and 5 G infrastructure and their mobile money platform. Even if they do take on debt airtel has a history of deleveraging quickly. In my view what you said above is not something I am concerned about too much. I am comfortable letting this play out because it's the nature of the industry. I still believe Airtel is well-positioned to do well and I don't see those things that you highlighted as something I am that worried about. One last thing Airtel has a very large market share in many of the countries they operate in and I don't think it is easy for anyone to just come into the market because you still have to understand the consumer habits and its very difficult to understand that if you are a foreign business coming in. Airtel understand their market very well more than anyone and that is why they have seen rapid growth in all their segment.
Interesting thoughts, thanks for sharing
Excellent review again. Thanks for sharing
Thanks, I appreciate it. What do you think about this company?
I agree. I think it would be wrong to not take the opportunity to invest in these emerging markets