Finance Leases and Astute Management the Difference for Airtel in 2017
Airtel Networks Plc, Telecom
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Monica Musonda has every right to be a proud board chairperson of Airtel. Her opening statement in the 2017 annual report was indicative of a Telcom leader who not only believed in the technology they delivered at the epilogue of 2017 (the 4G LTE Network that led to the price war) but also has deep faith in her management team and the staff of Airtel.

Although the macro environment presented many challenges that included fierce competition from their near rival and the ushering in of a new Licensing framework by the Zambia Information and Communications Technology Authority (ZICTA), the company declared a profit and dividend that definitely made loyal shareholders very happy. However, although changes in the regulatory regime brought together consolidation of licensing, it also opened up the market for a 4th mobile player (who we now know is UZI of Angola).

Under the astute leadership of Peter Corera (Managing Director), Airtel was able to achieve 100% compliance in the Know Your Customer (KYC) regulatory requirement. However, in other regulatory arenas, there was a small matter of meeting the full requirement of having 25% listed shares on the Lusaka Securities Exchange. Airtel has shown commitment (through sale order announced on LuSE) that they will offer 6% of ordinary shares so that they can be fully compliant. Indications from the firm are that they have already started conducting roadshows to attract investors. Share offer inevitable.

Revenue for the firm in 2017 came in 4.4% shy of its 2016 high of K2.297 billion. Of note was data, connection revenue and value added services content had significant increases whilst revenue from voice and other services reduced. The biggest loser in revenue reduction was hand sets and accessories division that saw revenue plummet from K44.7million in 2016 to 15.8million in 2017.  However, Peter Correia’s team remarkably reduced cost of sales by 38.5% partly achieved through a notable 12% reduction in SGA (administration costs). They went lean. The end result was a 78.1% increase in operating profit. However, net currency exchange losses would have the final say on what earnings the company would declare. Net earnings came in 59% stronger in 2017 compared to 2016 at K363.978 million.

The reason behind this improved performance was the company’s ability to sweat the assets that they possess. In comparison to 2016, 2017 showed an increase of 7% in return on sales, 11% increase on return on non-current assets (their Telcom equipment). In addition, there was an improvement in the management of working capital as their working capital cycle moved from 129 days to 48 days. This was largely pushed by the reduction in inventory days. Furthermore, their balance sheet showed that they had reduction in store inventory by over 94%.

For investors and capital contributors to the firm, the return on capital employed (ROCE) increased to 49% from 25% in the previous year. Although this was not as high as their 2015 ROCE of 63%, this is indicative of a company finding its way home (its old equilibrium). Equity shareholders enjoyed a return of 78% compared to 25%.

With a staff compliment that has reduced by 22% since 2015, labour to revenue productively increased by 22%. An oxymoron considering revenue increase is tapering. Conversely, their liquidity position has seen them not cover their current liabilities through current assets. With current assets being less than liabilities for 3 years in a row, trade payables (non interesting bearing short debt i.e. money owed to suppliers) are the elephant on balance sheet under liabilities. Using the working capital formulae of current assets less current liabilities, this yields a negative working capital position. Hence it is no surprise that in in July 2017 the firm obtained a short term credit facility from CITI Bank for US$ 50 million at an interest rate of 1 month Libor + 1.25 % per annum ( an unsecured loan facility is repayable within 12 months) as part of capital structure strategy. Short term borrowings come in handy for working capital management. For financing CAPEX, they are employing a flavor of finance leases whose average age is 10 years. Part of these finance leases go to the facilitation of the use of the towers which they sold 2 years ago to IHS. This is becoming an industry standard strategy (their near rival has done the same) as they clearly want to focus on their core business. Furthermore, going this route will ensure they do not suffer the drudgery of carrying depreciating assets that have potential of not only spoiling the balance sheet but can be heavy on OPEX as well.

As revenue from data remains one of their strongest cost centers, with the introduction of 4G LTE we believe the firm will innovate around this technology. SMS and voice have definitely suffered from the consumer’s ability to use data for all things communication. The annual report confirms this position as Peter and his team have declared that their focus in 2018 will be developing their data strategy as there are evident growth opportunities in that space. Furthermore, they will continue with network upgrade with particular focus on increasing their mobile money distribution points.

In the interim, we envisage that there will be zero sum in terms of revenue increases once the 4th player comes on the market. We expect that the player in the game mobile in Zambia will be won by the company that has a strong first mover advantage or enters the game as second mover with an outstanding offering that will attract the more that 12 million customers currently shared by incumbent players.

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