Helios Towers FY19 results, June notes and interview

Helios Towers announced its first full year’s results as a public company this March 12, running to 31 December 2019. As we have grown used to seeing from Africa’s third largest towerco, they have added new sites, new tenancies, increased revenue and EBITDA, as Helios Towers continues its organic growth and programme of operational excellence. TowerXchange here summarises the 2019 results and includes some exclusive comments from CEO Kash Pandya, and CFO Tom Greenwood.

Revenue increased by 9% year-on-year to US$388mn from US$356m in 2018. Q4 revenues increased by 3% quarter-on-quarter to US$100mn which suggests growth in revenues will safely continue through 2020. Adjusted EBITDA increased by 16% year-on-year to US$205mn, up from US$178m in 2018, due to both tenancy growth and continued improvements in operational efficiency, with Helios Towers’ Adjusted EBITDA margin increasing to 53%, up from 50% in 2018. The long-term trend of EBITDA growth continued with Q4 2019 Adjusted EBITDA increasing by 2% to US$54mn, up from US$52mn in the previous quarter, the 20th consecutive quarter of growth.

Year-on-year the number of tenants on Helios Towers sites increased from 13,549 to 14,591 tenants and the number of towers increased from 6,745 to 6,974, pushing their tenancy ratio increased up by 0.08x to 2.09x.

TowerXchange: Helios Towers continues to deliver solid organic growth, what do you put that down to?

One of the investors on our results call, commented that they were very pleased to see Helios Towers deliver 0.08x growth in our tenancy ratio to 2.09x, thinking it was very positive. But that level of growth is within our expected range, we have always delivered between 0.05x to 0.11x growth in our tenancy ratio year after year. So it’s good that our normal performance satisfies our investors.

We are lucky to operate in markets with strong macro fundamentals. Africa is the last frontier market for telecoms, with subscriber levels still below 50% in lots of markets. In Tanzania and the DRC, which make up 79% of our tower count, subscriber penetration sits at just 40%. That’s a big reason why our numbers will continue to deliver.

Our business strategy has been to create a business which is very efficient and customer-centric, which means that as we bring on new towers and new tenants our EBITDA margins grow. Because of our operational efficiency, our costs per tower is declining, which allows for greater cashflow through the business. Portfolio free cash flow grew by 27% in 2019, following a 37% year-on-year increase in 2018.

So organic growth is very good for us, and we see strong reasons to expect it to continue. Penetration remains low, as does geographic coverage in our markets, and many countries have only recently moved to 4G, so there is also room for amendment revenues as technology on towers is upgraded. The societies we serve are becoming more reliant on data consumption and that’s good for our customers, who then want more towers and more equipment.

As I have articulated in the past, we want to move beyond our nearly 7,000 towers towards 12,000 towers and go from five to eight geographies in the next five years.

TowerXchange: Africa Mobile Networks is going to become the fourth largest towerco in Africa by the middle of 2020, using a different business model to Helios. How is Helios planning on competing in rural sites?

We like competition in any of our markets, we think competition is healthy for our customers and for the market. It also makes us sharper, and makes us perform better and so we welcome the entrance of people like Africa Mobile Networks and other rural vendors. In response, we have evaluated a lower cost solution for rural areas, and we are ready to compete.

However, we offer a different service overall. Our customers value our track record and there is a degree of resistance from the big five African mobile network operators to go with new entrants who don’t have the track record.

Helios is not making short term investments, our investments are made with a 25-year horizon. We are installing multi-tenant ready towers, with the capacity for additional power to service multiple operators. Because we take the long view we’re maintaining a good relationship with our customers. Competition will only make us sharper, and innovation in rural solutions will be good for the sector.

TowerXchange: Your FY19 report highlights Siterra by Accruent coming online at the end of the year, what are the next steps for optimising asset management?

Siterra development hasn’t been quick, but our business excellence strategy has always been about using data to make better decisions. Siterra is an enabler to our existing business strategy of moving towards a Lean 6 Sigma experience for power uptime. Siterra is a great platform, and over the next three-year horizon we will be bedding it in and getting the most out of it.

Siterra was installed in Q3 last year, but it is one of multiple systems we use across the business to enable data-driven decisions. Another key operational system we installed a couple of years ago is ServiceNow, which is our main field operational tool which controls and tracks all field activity. We embedded that two years ago and that sits side by side with Siterra. We already use other remote monitoring tools, OSS feeds from each site, but Siterra gives us even better granularity of data and simply enables us to make better decisions.

Looking to the future and at further automation and the internet of things, we already have that in some capacity, particularly around fuel levels and generator run hours, and we are already looking at maximising efficiency and asset life. Everything is focused on business excellence, but we can do more.

A key performance indicator for us is the number of site visits made per month. We have driven that down probably four or five fold over last four or five years. We now have a net target of one site visit per quarter. That means we can save significantly on monthly maintenance bills and extend asset life.

TowerXchange: How is Helios Towers preparing for 5G in South Africa?

South Africa is one of, if not the, most technologically advanced states in the continent. That is one reason we are using South Africa to incubate our skills in new areas like fibre, especially fibre to the tower, and small cells, where we are rolling out small cells right now for one of the main players there.

We have been following the news from Liquid Telecom closely, Liquid Telecom have a 5G licence and will provide wholesale connectivity to Vodacom in South Africa. Effectively what Liquid has done is to take a licence and move in the spectrum infrastructure space using some 5G-ready spectrum they own, but Helios Towers want to remain in the physical infrastructure space.

In the next five years, South Africa should have 4mn 5G subscribers. Helios already have a good footprint in the Johannesburg metro area, which will be a main 5G area and we will soon be moving into the Western Cape region. The market is ready and we are very much ready from a regional and technological perspective.

Reported as of 31 December 2019, $2.872bn at 7.2 years average remaining contract life

TowerXchange: How is Helios Towers responding to COVID-19?

We are taking similar precautions to those lots of other companies are; we have limited travel, for example. But we are fortunate that many of our business as usual processes are appropriate for managing pandemic exposure.

For example, we are pleased that over the last few years we moved to having no expats in markets, all our opcos are run by Africans which means that travel restrictions will have a minimal impact on our operations. With regards to technology, we are already reliant on phone calls, video conferences, et cetera and so we will be leveraging those even more.

In 2016, we looked at our supply chain and decided to make sure our supply chain was secure. So in terms of inventory, consignment stock, and having multiple suppliers for the same product, we are well insured against disruption.

In Africa, at difficult times people rely even more on their mobile phones, so while times are bad our customers see more business and make more money, because people need mobile networks. We feel confident our customers will be okay through this pandemic, and that we are operationally capable of delivering.

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“Helios’s 4Q19 results represent another proof point, if any were needed after 20 straight quarters of sequential EBITDA growth, as to why it should trade on a higher multiple here. Elsewhere, we sense that 2020 could see a step-up in the M&A leg of its capital allocation story. Its sell-off on the back of macro recessionary fears emanating from the COVID-19 virus is unjustified (we see neither a risk to momentum nor fundamentals). Reiterate Buy.” Say Jefferies analysts Giles Thorne and Sebastian Patulea, CFA.

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Stop the press: Helios Towers prices new notes

Shortly before TowerXchange went to press in June Helios Towers issued US$750mn of new senior notes, improving its financial position and bringing its dry powder up to US$450mn. TowerXchange spoke briefly with Tom Greenwood: 

TowerXchange: Many of our readers are either engineers or network operators by background, so how would you summarise the implications of this bond pricing for them?

On Monday we started a refinancing of our existing debt, but we were also able to add more debt capacity and credit lines to the business. Now this deal is done, we have more cash on the balance sheet and unwound old loans.

We have around US$450mn of liquidity now available. This goes hand in hand with our strategy in which we plan to increase our tower count from 7,000 to 12,000 and increase from five markets to eight over the next five years.

From a supplier perspective we hope to get more BTS orders, but that was happening anyway and we plan to fund organic growth through existing cash flows.

But the $750m notes are big news for our customers, because they position us for new acquisitions and entry into new markets. From a customer perspective, some of them might be thinking about selling their towers and this puts us in very good readiness for that. We have the fire power.

TowerXchange: To what do you credit the investor appetite for the notes pricing?  Do you think it is due to Helios Towers’ resilience in the face of the pandemic that has helped to prove your model in the eyes of investors?

The business is resilient to coronavirus and we have spoken about that with our investors.

Investors understand that the telecom sector has seen very strong demand throughout this time and that this is a good thing for tower companies.

Our Q1 numbers came out strong and we have maintained our guidance for the year.

But it isn’t all to do with coronavirus resilience.

We had an existing bond and we were now entering the bond market for the second time. Bond investors know us and have been happy with our performance. Since our first bond, we have doubled our EBITDA, expanded into a fifth market and became a plc after listing on the London Stock Exchange last year. All those things whet investors’ appetites for a bond.

We were the first African corporate issue since the COVID-19 crisis began, so in a way we reopened those debt capital markets. We had a really strong signal of the business performance and investor network so we were able to upsize the deal.

On Monday we went out tentatively because we were the first African corporate, and proposed at US$425mn sized deal and were met by huge demand. Yesterday we opened the book and upsized and ended up finishing at US$750mn. That’s testament to the business and the towerco model.

We have US$2.9bn of future contracted revenue from our tenants at seven years weighted average lease term remaining. That is a very strong and compelling backing for a note issue.

We caught the market and the window at the right time. There may have been some pent up demand because there hadn’t been an issue for a number of months. We planned to raise money and were ready to go quickly when credit markets started improving.

TowerXchange: What role did Environmental, Social, and Governance (ESG) factors play in the fundraising?

There is now a big ESG angle for a lot of investors. There have always been ESG investors out there, but now big institutional investors are all looking at it. ESG is becoming a much bigger component of any investor relations job. But ESG matters have been a continuous evolution for us.

In the current deal, we had two developmental finance institutions (DFIs) as anchors; DEG (the German government-backed DFI) and The Emerging Africa Infrastructure Fund (The EAIF is funded by the governments of the United Kingdom, The Netherlands, Switzerland, and Sweden). Those two investors were keen to support the deal, in part because they think towercos are intrinsically good for ESG. Since day one we have had investors from development or ESG-type investors. For example, the IFC were an original shareholder and before these bonds we had lots of term loans from DFIs.

The towerco model relies on sharing resources, reducing duplication and Helios Towers specifically invests in solar, hybrid and connecting sites to the grid. We can demonstrate that we have done a sizeable number of those in the last three years, and over the next three years we will be doing similar amounts again.

We are currently revamping our overall ESG business strategy. We have a new a dedicated Group Head of ESG and Sustainability who brings significant experience in this field and is now driving this forward for us. Over the next 12 months, you will see a significant amount of communications around our ESG strategy.

Along the reporting side comes the overall strategy. We have to ask ourselves, what do we want to achieve? And then follow through with the right ESG governance and KPIs.

Do you think M&A will be significantly affected this year by coronavirus – the lack of travel, the uncertainty, the economic damage – or do you think business will regain its momentum?

The trajectory for M&A remains on course with regard to our expansion plans. There is a significant pipeline out there – in fact, that pipeline increased in last few weeks.

There are small challenges – for example, you can’t travel to assess sites but you can get around most issues just by being clever about how you do the deal and complete due diligence.

We have been doing physical site audits in the past month in one new market, and before coronavirus we would have flown people there. But instead this time we found a decent engineering firm on the ground and worked with them remotely.

It is difficult to say when a deal will get signed, but there is a pathway for some deals to be signed this year.

For example, we signed a small acquisition from Eagle Towers in South Africa a few weeks ago (see infobox), and that was at the height of the lockdown in South Africa. We have a few other small ones like that which are imminent so you can see we still continue as normal.

We are able to do deals, raise money, and I think MNOs will see that and be encouraged to get deals done. Helios is looking to deploy capital in the most value accretive way we can.