Helios Towers: Co-location drives healthy growth despite MNO consolidation in Africa

Since their successful bond issuance in 2017, Helios Towers has been the most transparent of the ‘Big Four’ African towercos, who between them own 38% of the towers in Sub-Saharan Africa. At Q218, Helios Towers owned 6,533 towers, including market leading portfolios in Tanzania, DRC and Congo Brazzaville, with a strong urban portfolio in the Ghanaian market. In their disclosure of their H2 results, and a subsequent exclusive interview with TowerXchange, Helios Towers reveal some of the governing dynamics driving growth in African towers.

TowerXchange: Congratulations on Helios Towers’ impressive H218 results. Revenue is up 4% for the quarter, 5% year on year for the half year - what’s driving that?

Thank you, we are very pleased with the results. Our continued growth in revenue and adjusted EBITDA is driven by organic demand and reinforced by our business excellence strategy that is driving margin growth with Q2 2018 adjusted EBITDA margin at 49% which is a 9 percentage point increase from a year ago.

In terms of revenue drivers, it’s predominantly volume - we increased from 12,701 to 12,996 tenancies – plus the effect of standard escalators linked to CPI, fuel and electricity. Our EBITDA and EBITDA margin growth is driven by improved tenancies ratios and, as Kash mentioned, by our business excellence strategy.

TowerXchange: How does that contribution break down in terms of new tenancies versus amendment revenues (extra space being taken by an existing tenant)?

While the exact mix is confidential, the majority of our revenue growth is derived from standard co-location rather than amendment revenue. In Africa we generally expect the main driver for growth will continue to be pure co-location volume, increasingly driven by additional coverage and capacity.

Some of Helios Towers’ markets are amongst the least developed in the world, with the biggest infrastructure gaps. For example, the DRC has one of lowest mobile penetration rates in the world – just 25% of people have a mobile phone – that’s low even for Africa. And only 50% of the population have mobile coverage. So that higher proportion of pure play standard co-location growth is driven by closing the 15-20 year lag behind Europe and the U.S. in terms of coverage and QoS.

That said, we are seeing amendment revenue come through and we forecast that it will grow particularly where there are technology upgrades i.e. 2G to 3G and 3G to 4G. In DRC they have just issued 4G licenses to Vodacom, Africell and Orange with Airtel rumoured to be launching soon. 4G licenses were issued in Congo Brazzaville a few months ago too, and we’re seeing activity from that, initially focused on the larger cities.

TowerXchange: Your results also show cost of sales improving to enhance margins – can you put some colour on your reduced power costs?

We’re reducing opex by investing in solar hybrids, grid connections, and through the business excellence strategy where we are looking to remove waste and do more with less.

We now have 430 solar sites deployed in DRC, where cost of delivered diesel is highest and where grid availability is worst among our portfolios.

Our solar investments are generally delivering a three to four year payback – we think that’s a good investment thesis, and it benchmarks well with our peers.

In contrast, we have focused on grid connection in Tanzania, where now more than 80% of our sites are on grid. We have a programme to push to get grid connections in all our markets, driving opex costs down due to less expenditure on fuel.

We have also developed a culture of business excellence since late 2015; investing to drive waste out of our business processes, doing more with less, improving margins and productivity, making our supply chain more efficient, and improving capex spend. Last year we trained 70 people in lean six sigma, and we’re adding 80 more this year. This is not just a two day workshop – it’s four weeks of training to earn to black belt, with deliverables inbetween. This is just one example of management tackling inefficiency in a structured way to help improve our margins.

TowerXchange: Your tenancy ratio is up 0.04x on the year – how suppressed is that by the MNO consolidation in Ghana (Airtel and Tigo merged)? And how much is that offset by new build?

New build volumes are always lumpy in Africa. There can be big rollouts then quiet periods, and many of our customers’ financial years end on March 31, so Q2 tends to be slower for rollout.

With regard to the Ghana transaction; we were successful in a public auction driven by the merger of Airtel and Tigo, which enabled us to successfully secure a contract extension from 5 years to 15 years. Part of the agreement was to allow cancellation of 140 tenancies driven by the fact that the two mobile operators coming together had a degree of overlap in their network coverage. However we increased the lease rate to ensure we were revenue and EBITDA neutral.

We negotiated and found a revenue and EBITDA neutral win-win outcome and are happy to have secured a long-term partnership with Airtel-Tigo, which is going to be a strong number two player in the market.

TowerXchange: Do you have the champagne on ice ready to hit a tenancy ratio of two?

We actually achieved that milestone in Q1 2018 but came backward a little since due to the effect of the Airtel-Tigo merger.

Our medium term ambition is a tenancy ratio closer to three than two, and with typically four strong MNOs growing and investing in each of our markets, we remain confident that ambition can be realised.

Even in cases of consolidation like the aforementioned Airtel-Tigo in Ghana and Orange and Tigo in DRC, the combined MNOs emerge stronger and ready to invest more in rollout.

TowerXchange: You also released some information today about your DRC backbone project - what can you tell us about that?

DRC is the 11th largest country in the world and is the size of Western Europe, yet huge parts of the country remain uncovered by mobile telephony.

Helios Towers are building a 1,800km backbone network for a number of high profile MNO customers. To put it in context, that is the distance from London to Rome. Our customers want to invest in the DRC because of the huge growth potential there, estimated at about 15% subscriber growth year on year. In building this backbone we’re opening up mobile services to an additional six million people in the north of the country, specifically North Kasia and Kisangani.

The backbone network includes towers which are roughly 40km apart and are 80-100m in height so that they clear the forest canopy. Mounted on the towers will be microwave backhaul dishes, some of which are over three metres wide. We’re bringing 2G for the first time to many regions, but also now 3G and 4G data to remote parts of the country.

TowerXchange: What have been some of the operational challenges you’ve had to overcome?

Helios Towers has been in the DRC since 2010, and we’ve got a great organisation in the country, the majority of our staff there are local – typically we have only one expat in each market. Local management and people gives us a greater ability to overcome hiccups, and that’s essential in the DRC where there is a huge logistical challenge just getting from one end of country to the other. We are operating in parts of the country where there was no previous infrastructure.

The backbone build should be finished by the end of this year, then infill towers will follow and drive volume as Helios Towers are the only independent tower builder in the country.

TowerXchange: How would you sum up the highlights of Helios Towers’ strategy?

Our strategy has always been to maintain competitive price structure so we’re always cheaper than the customer self-deploying, and so we don’t get into operational cost challenges.

We believe it’s important to grow rather than buy margin – we have delivered 49% in Q2, and expect to break 50% this year. That said, we’ve done seven sale and leasebacks in seven years, the last with Zantel in Tanzania, and we continue to evaluate opportunities in our existing markets and beyond.