The past year has not been a reassuring one for shareholders in telecoms operator Airtel Africa (LSE: AAF). In that period, Airtel Africa shares have lost 30% of their value. They now trade for not much over a pound each.
That puts the company on a price-to-earnings ratio of 8, which look cheap to me.
Revenue last year grew 21%, while post-tax profits jumped 82%. Those are big numbers.
So, why have the shares been falling – and does their current valuation make them attractive as a potential addition to my portfolio?
Growing business
The firm’s business continues to perform strongly. Revenue in the first nine months of its current financial year grew 12% year on year. Post-tax profit increased by 2%. Operating free cash flow grew 15%.
Airtel Africa looks like it is continuing to move forward. Set against that, markedly faster growth of revenue than post-tax profit can be a sign of falling profit margins. That is a risk as the company seeks to keep growing, although with a net profit margin for the first nine months of 13%, the company’s earnings remain sizeable.
I think the firm is well-positioned to keep benefiting from the surging use of digital payments in Africa. In its most recent quarter, the value of mobile money transactions rose 37% to an annualised level close to $100bn.
Possible risks
But why would a profitable company in growth mode focused on a market with massive untapped opportunities see its shares marked down 30%?
I think part of the reason is the risk environment. Africa is a volatile market with extensive political risks. Recent uproar in Nigeria around a switch in banknote legality is an example of how operators in such places can face extensive and sometimes highly unpredictable risks. Then again, that specific example could actually present an opportunity for the mobile money arm of Airtel, which has a big operation in Nigeria.
Net debt also moved up in the most recent quarter, reaching $3.6bn. For a company with a market capitalisation of £4bn, that strikes me as high. Servicing it could eat into dividends.
Are the shares cheap?
Even given those risks, I think the telecom company’s current share price looks cheap.
Its addressable market is large and growing. Penetration remains lower than in some other markets. The growth of mobile money could act as a profit driver for Airtel Africa in coming years on top of its already substantial earnings.
Although there are risks, I think the shares are already priced to reflect them.
I am wary of investing in businesses that are very heavily exposed to just a few African markets, as the risks can be substantial. So, although I think these shares are undervalued, for now I have no plans to buy any for my portfolio. I will be keeping an eye on the company though, and may decide to dip my toe in the water if I become comfortable with the political risks involved.
The post Down 30%, are Airtel Africa shares now undervalued? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.