Airtel Africa: Weak oil creates cheap telecommunications play on Nigeria

Oil prices matter for Airtel Africa. This might seem strange for a mobile telecommunications company. But Airtel Africa depends on oil-rich Nigeria for about 40% of revenues and EBITDA.

The FTSE 100-listed company revealed a bigger-than-expected result change shot on Thursday. The shares fell accordingly. Traders fear that the drop in oil prices will further damage the Nigerian economy. Even so, a lot of bad news feels obvious.

The price of benchmark Brent oil has fallen 29% over the past year. This puts pressure on Nigerian export earnings at a time when inflation is rising to more than 20% annually.

The naira has depreciated by about half. Understandably, the market expects more to come.

Airtel Africa’s foreign exchange losses last year amounted to $178 million, nearly half of which came from Nigeria. The company conservatively includes these losses in its “adjusted” net income. As a result, reported earnings missed quarterly expectations.

The share price fell 8%, putting it on a very cheap corporate valuation of just three times next year’s EBITDA.

This belies an illuminating perspective. For one thing, the dollar’s powerful rally against major currencies is long over. Many expect the US Federal Reserve to halt its interest rate hikes.

In addition, Airtel Africa’s underlying business performed well. Its mobile money business in Africa continues to grow nearly 30% year-over-year, in constant currency terms. The unit generates more than 13% of group revenues, compared to less than 12% a year earlier, and EBITDA margins are close to 50%. Falling oil prices are expected to reduce the cost of running generators to power cell towers on Nigerian diesel, New Street analysts noted.

Airtel Africa thus offers economic exposure to Nigeria and East Africa, a region where mobile phone services are in high demand. The impact of the deeper devaluation of the naira is already offset by the low share price.