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Old Mutual Investment Group, one of Africa’s leading investment managers as well as regional investment bank, Dyer & Blair have separately endorsed investments in the ongoing Airtel IPO, rating it a good buy.
The two investment banks, in separate research notes seen by this reporter, give the telco’s past steady in some cases faster-than-industry growth across key fundamentals as well as strong industry prospects as reasons for their strong buy recommendations.
Airtel Uganda, a subsidiary of Airtel Africa, itself a subsidiary of India’s Bharti Airtel, on August 30th 2023, kicked off the sale of 8 billion shares (20% of the issued 40 billion shares) for UGX100 each, a sale expected to fetch some UGX800 billion.
The offer price values the company, at UGX4 trillion.
The offer shall close on 13th October 2023 at 0400pm. Results of the allocation shall be announced on 30th October 2023 at 04:00 pm and thereafter the company shall on 31st October 2023, list the entire 40 billion shares on the Main Investment Market Segment of the Uganda Securities Exchange (USE).
The telco which has been present in Uganda since 1995 and is the second largest with a close-to-call 49% revenue market share and 47.3% subscriber market share, respectively.
“We initiate coverage on Airtel Uganda with a BUY recommendation based on a target price of UGX 123.74, representing an upside of 23.7% from the listing price of UGX 100.00,” Dyer & Blair’s Lucy Odhiambo, a Research Analyst writes. Further, the company will be offering 5 incentive shares for every 100 shares allocated to retail investors applying for 2,500 – 18,500,000 shares, implying an effective price per share of UGX 95.24 (representing an adjusted upside of 29.9% based on our target price),” Dyer & Blair further advises.
“Airtel Uganda’s subscriber market share stood at 41.65% as of FY22, netting 13.78 million subscribers in that period. The company’s subscriber numbers have grown by a 3-year CAGR of 8.3%, faster than industry CAGR of 7.5%… The telco’s Return on Invested Capital (ROIC) has averaged 26.8% over the past 3 years. Management has indicated a 95.0% dividend payout going forward,” Dyer & Blair further says.
The investment bank’s assumptions are based on an 8.3% per cent growth in subscribers to 14.9 million in 2023 as well as a 7.5% growth in voice revenue to UGX997.5 billion well as a 15.6% growth in value-added services (VAS) and data revenue “on the back of a 23.7% year on year increase in mobile data subscribers to 39.6 million.
According to company estimates. Airtel whose net profitability has grown from UGX338.1 billion in 2018 to UGX459.6 billion in 2021, dipping to UGX325.7 billion, after spinning off the mobile money arm as required by regulators, is expected to pick up again to UGX443.6 billion in 2023, reaching UGX683 billion in 2025.
A Dyer & Blair buy recommendation, according to notes provided by the investment bank means, “share price may generate more than 15.0% upside over the next 12 months”.
Above industry growth
In its stakeholder research note, Old Mutual Investment Group said the Airtel IPO “valuation profile is compelling”.
“We issue an accumulative buy recommendation with a 12-month target price of UGX 110.61, being representative of a 10.61% upside to the IPO offer price of UGX 100 on the back of a two-year normalised earnings CAGR of 11.64% and forecasted P/E of 8.44x,” Old Mutual said, adding that the key catalysts for the recommendation were a “potential special interim dividend of UGX 8.5 and projected dividend yield of 13%” and a “strong execution on top-line growth”.
Old Mutual also said that a five-year headline earnings CAGR of 11.6% coupled with margin expansion and above-industry trend cash flow generation would lead to earnings growth in excess of EBITDA growth despite higher finance costs on dollarized debt.
“EBITDA leverage, combined with greater associate earnings and a normalisation of the tax rate to 30% will likely support higher effective net income from EBITDA conversions,” Old Mutual wrote.
It also said the telco was “competitively positioned on cost curve versus peers”, noting “Airtel has several competitive advantages that shield its performance in industry, it operates at the lower end of the industry cost curve, with a notable cost advantage over other GSM segments”.
Old Mutual also singled out Airtel’s past “sustained gains in revenue market share in the preceding period, off the back of superior growth in average revenue per user (ARPU) relative to the main regional competitor” saying this, supported by “investment in 4G infrastructure allowing for greater revenue generation”.
Old Mutual however called out Airtel’s large debt exposure, amounting to USD3.05 billion, saying “heavy investment in deploying widescale 4G networks has come at a cost as the operator has borrowed to expand its networks over the years”.
Recently, Dr. Sudhir Ruparelia Uganda’s richest businessman and a serial stock exchange investor, also endorsed the Airtel IPO as a good buy.
“With forecasted earnings per share of UGX22 per share this year and an expected rate of return of around 12 per cent on dividends⏤ for a price of UGX100 at IPO, it is a really good prospect. I am definitely putting (investing) in. I’m just going to study and see how much am going to invest,” he told CEO East Africa Magazine.