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Airtel Africa to join FTSE 100 – another driver of recent share price rally

  • Airtel Africa will join the FTSE 100 on 31 January; this may facilitate another increase in the stock price in the UK

  • Shares hit all-time highs recently driven by mix of factors; in local Nigeria listing, FX concerns contribute to rally

  • Overall, we believe Airtel Africa has a strong growth story and FTSE 100 inclusion may facilitate fair value realisation

Airtel Africa to join FTSE 100 – another driver of recent share price rally
Tellimer Research
28 January 2022
Published byTellimer Research

Shares of Airtel Africa have rallied significantly in the past few weeks, with the stock hitting an all-time high of NGN1,271 (AIRTELAFRI) on the Nigerian Exchange Group (NGX) and GBX149 (AAF) on the London Stock Exchange (LSE). In the last six months, the stock has gained over 100% on the NGX and c79% on the LSE. As a result, the current share price is now above the Bloomberg analyst average 12-month target price of NGN873. In this report, we examine some of the drivers of this rally and the reasons for our positive view on the stock.

Airtel Africa has rallied in recent times

FX concerns may be driving a rally in the local listing...

Nigeria's FX situation has been quite chaotic. The illiquidity in the investor and exporter window (I&E) of the FX market since April 2020 has kept foreign investors in the Nigerian market (against their will). Although the Central Bank of Nigeria (CBN) is reportedly reducing the FX backlog, investors claim that the focus is still on bonds while equity investors have been left behind.

Inflows into the I&E window by source (US$ bn)

In order to exit the market, investors are now taking advantage of every legal opportunity they can find. One such opportunity is to take advantage of dual-listed stocks, eg buy Airtel or Seplat shares in the Nigerian stock exchange and sell them in the London Stock Exchange. We noticed the first rally in Airtel Africa's stock price on the NGX started in June 2020 after the CBN stopped stopped selling FX in the I&E window (and the parallel market) and it became increasingly difficult to exit the Nigerian market.

Using the dual-listed stocks as an exit can often be expensive – large ticket exits drive prices up in the Nigerian market, which comes at a huge cost for investors as the implied exchange rate becomes significantly higher than the actual FX exchange rate. That investors are undertaking such routes possibly highlights the extent to which they want to exit the Nigerian market after being stuck since 2020.

To illustrate this point, we compare the implied exchange rate represented by the prices of the two stocks on the NGX and the LSE to the parallel and I&E rate of NGN/GBP.

The unconventional exit route

The implied exchange rate of Airtel and Seplat spiked in April 2020 when the CBN closed the tap on FX supply to the I&E window. The rate normalised after a few months when the CBN began selling some FX in the I&E window again. Airtel's implied exchange rate spiked again in January 2021 when the CBN reduced interventions to the I&E.

Note: We do not always expect perfect equivalence of the implied exchange rates and regular (I&E and parallel) rate because of factors such as varying individual market conditions of the NGX and LSE, transaction costs and individual fundamentals of the stock.

...While the FTSE 100 inclusion may be driving a rally in the UK listing

On 26 January, FTSE Russell announced that Airtel Africa will be joining the FTSE 100, which includes the top 100 companies on the London Stock Exchange, with effect from 31 January. The company had previously been a part of the FTSE 250.

Joining the FTSE 100 would mean more trading volume and liquidity. We strongly believe the FTSE 100 inclusion will increase investors' interest in the stock.

But good reasons to believe in the long term fundamental story

While these technical factors may be driving the share price to an extent at the moment, we have good reasons to believe in the long term fundamental growth story, which is likely to be driving the price increase.

Below, we present three reasons for our positive view on Airtel Africa:

1. Clear growth story

Airtel Africa, one of the biggest listed firms in Nigeria with a dual listing in London, is a mobile network operator operating in 14 African countries with low mobile and – most importantly – internet penetration. The company is well placed to capture the growth in internet usage in Africa over the next few years. Airtel's growth has been fuelled by robust increase in data revenue over the past couple of years and we expect this to continue.

H1 2021/22 snapshot

Source: Company presentation

2. Trading at a significant discount

We have previously highlighted that Airtel Africa seemed under-priced compared to its peer Safaricom and that we expected a convergence to occur. We conducted an analysis where we applied Safaricom/M-Pesa multiples to other Sub-Saharan Africa telcos, and it showed a wide disconnect in investor perceptions.

Clearly, the market was not adequately pricing the mobile money business of Airtel Africa. Since then, Airtel Africa has acquired approval-in-principle to operate mobile money (payment service bank) in Nigeria, its biggest market.

The company plans to list its mobile money business separately. This, we believe, could lead to fair value realisation.

3. Balance sheet clean-up

Airtel Africa is cleaning up its balance sheet – its leverage has declined significantly and debt to equity ratio has reduced to c75% from over 100% in the past year. The clean-up is powered by increased profitability, capital freed up from tower sales and equity raised for its mobile money business – Airtel Mobile Commerce. This makes it possible for the company to take on more growth opportunities across the continent.

African telco comparables

We reiterate our view that Airtel Africa will close the gap on Safaricom's valuation, and the FTSE 100 inclusion might turn out to be a catalyst as investors' interest in the stock increases.

We will be closely watching Airtel Africa's 9M 2021/2022 results, which will be released on 4 February.

Related reading

Airtel listing set to boost Uganda stock market, January 2022 (Omole)

Nigeria: Stealth devaluation possibly underway, November 2021 (Curran, Ogunkoya, Omole)

Mobile money is coming to Nigeria – a game-changer for financial inclusion, November 2021, (Shah, Omole, Kumar, Adwani, Jeje)

Mobile money in Africa: Deep value beyond Safaricom/M-Pesa, June 2021 (Shah, Kumar, Amole)

Nigeria: Another meaningless naira devaluation, May 2021 (Curran)

Airtel Africa digital payments unit valued at US$2.65bn; IPO plans still intact, March 2021 (Shah, Kumar, Amole)

Airtel Africa: Stake sale could unlock Airtel Money's value; re-rating possible, February 2021 (Kumar, Shah)