How Helios Towers broke through the 50% EBITDA margin and 2.0x tenancy ratio thresholds in the last year

On the 25th February Helios Towers announced results for the 12 months to 31 December 2018. The big picture story remains one of continued organic growth through co-locations, amendment revenues and built-to-suit, driving margin improvements through Helios Tower’s Lean Six Sigma approach to operational efficiencies. The next big step for Helios Towers is the recently announced expansion into South Africa, through a partnership with Vulatel and acquisition of SA Towers, which provides the infrastructure platform to enter into one of Africa’s largest and most attractive markets. TowerXchange interviews Helios Towers CEO Kash Pandya on the activities behind the figures.

TowerXchange: Before we dig a little deeper into the numbers, please give us your initial thoughts on your 2018.

We’re very pleased with what we have achieved and the continued growth we’ve seen in 2018. We’ve had four years and 16 consecutive quarters of adjusted EBITDA growth. Our 2018 average was 50% across the whole year, but 52% in Q4, so we’re well on our way to hit our unofficial target of 55% EBITDA over the next year or two. We’ve come a long way from our Q1 2015 EBITDA margin which was just 25%.

The numbers have been driven by a couple of things, including our Lean Six Sigma approach to operations, but we’ll get to that later. I want to highlight the strong macro performance and potential of the markets in which we operate. DRC, Congo Brazzaville and Tanzania all have low mobile penetrations versus their high populations but mobile revenues are consistently growing. They also have good overall demographics with 70% of the population under 30. In Tanzania and DRC, 4G licences were only issued last year and handset costs are coming down rapidly which is good for uptake.

In addition to macro factors, we are the only independent towerco in three of the markets in which we operate. And in Ghana, where we face more competition, we won an open tender to become the towerco of choice following the Tigo/Airtel merger, which will be the country’s number two operator. All the countries we operate in are dynamic and young and we’ve seen strong revenue performance so far and importantly there’s a lot of potential for more tenancies and more organic growth in each of our now five markets.

TowerXchange: As you say, you started 2019 by entering your fifth market, South Africa, please tell us more about your partnership with Vulatel and your acquisition of SA Towers.

We have signed a partnership with Vulatel and have signed an acquisition of SA Towers. Vulatel are a major player in the fibre-optic market in South Africa and SA Towers are a leading small independent towerco. Together as Helios Towers South Africa we expect to be publishing our first tower count at the end of April. At that time we expect to own a portfolio of around 100 towers with a pipeline of about 500 more. So our initial plans are to bed-in the partnership and hit the ground running with our pipeline of towers. The South African model is very different to our other markets as there is no power management included in tower contracts, but we are happy to offer power management if any customer or site requires it.

In the medium term, we’re really excited to bring together SA Towers management team and their local planning and permitting experience with our technological expertise and our Lean Six Sigma approach. The organic growth opportunity of South Africa is great and we hope to build and own 1,000 of the 7-8,000 towers South Africa needs over the next 3-4 years. There’s 30,000 towers in South Africa with only 10% sitting in independent towerco hands, so the potential for acquisitions is healthy too. It’s also the African market with the most established 4G market, and it’s predicted there’ll be 4mn 5G users within five years. This means there’s all sorts of opportunities for us, and we’re now in a good position to make the most of them.

TowerXchange: Last year Helios Towers stopped its IPO process, do you think there’s anything in these results which will affect your plans to IPO?

We planned to IPO in Q1 2018, around a year ago, but I don’t think any of the fundamentals of the business have changed since then. Potential investors who look at these results will see the same business delivering a good margin as was outlined at the time. Many companies were looking to list in early 2018 and a big proportion of companies, just like us, decided the dynamics in the equity markets at that time weren’t right.

What the results do show for a future IPO is that we have time on our side. Our current shareholders see a business delivering consistently, with strong margin and EBITDA growth. Unlike some other companies looking to IPO, we have positive operating cash flow and good debt facilities to raise money. Plus, because we have publically listed debt we have a lot of the governance and reporting in place already that is required of a public company, so we can go to market at a time that suits our shareholders, when market conditions are right.

TowerXchange: Revenues increased 3% year-on-year, can you break that down for us so we can understand the balance of growth in sites, growth in tenancies, and to what extent tenancy losses or consolidation reduced revenue?

In terms of consolidation, we try to consolidate wherever we can because it makes leases more efficient for our customers making them happy and helps reduce our opex. One area where this could have hurt us, but didn’t, was in Tigo and Airtel’s merger in Ghana. We had tenancies from both and where telcos merge they typically seek to reduce overlapping sites, which could have impacted on tenancies in the market.

The joint venture held an open competition for its new towerco of choice and we won that. They are number two in the Ghanaian market which means being towerco of choice will be positive for us in the long-term, but it also helped us in the short-term for managing the merger on our towers. Part of the award included cancelling 140 tenancies, which could have had a big negative effect on our in-market EBITDA, but thanks to our relationship through various measures we reduced tenancies in a EBITDA-neutral way. We had strong contractual protection for our sites in Ghana, but it is always best to come to a mutually beneficial arrangement. As part of the deal we also increased tenure in Ghana from five years to 15 years, so we’ve managed our short-term downside risks here and locked in some long-term security too.

We also saw some slower growth in the first half of 2018 in the DRC with the political dynamics around the election holding back growth a little. But since the election passed largely peacefully, we have seen things pick up again. We saw a strong Q4 in DRC with 200 new tenancies and I think the revenue impact of a weak first half of 2018 won’t have any long-term effects. The international business community has been very wary of political instability in DRC, but in terms of telecoms we’ve seen the market to be very robust. In 2017/18 our customers saw 15% growth and earlier in February Orange cited its DRC operations as a principal contributor to its 17% subscriber growth.

So even as there are risks for a slowdown in organic growth the, strong macro fundamentals hold up. Mobile penetration continues to grow and DRC remains one of the best markets. There are 85mn people with 40% SIM penetration and only 50% of the geography is covered. There’s huge potential. In the DRC last year we built two new backbones, one for Vodacom and one for Orange, of a combined 1800km in length. These only went live in the second half of 2018, so the revenue is only beginning to show. We’re actively talking about a third 500km backbone for another MNO. So while there is uncertainty, investment is continuing and we’re seeing results.

TowerXchange: Q4’s margin of 52% is a long way from your starting point of 25%, but what is the limit for you, how high can you push your EBITDA margin, and do you have an internal target you are working towards? 

In the medium term, by which I mean the next year or so, we want to break through 55% for a full year. Over the longer term, around 3-5 years, we’re hoping to break through and hit a 60% EBIDTA margin. Those figures are based on our existing markets, of course if we make a significant new acquisition we might have a lot of work to get the margins aligned on our new assets and existing assets. 

TowerXchange: How do you approach improving the opex performance and margin of individual sites?

We have a bit of a machine-like approach here to driving performance, and I mean that in a good way. We take it very seriously, down to things like me receiving a daily measure of our uptime and performance versus SLAs. We are geared towards providing exceptional power up-time. 92% of sites in existing markets are at Six Sigma levels, that’s 99.99966% uptime, which translates to 2 second of downtime per tower per week. That is much better than what is required in our SLAs, and we’re proud of that.

So I’d say we were very much focused on the 8% of towers which are not achieving Six Sigma levels of performance. A big part of that improvement has come, and will come, from investing in people on the ground level. Over the last three years we have really invested in developing local staff and we are going to continue doing that. 96% of our staff locally are nationals of the countries they operate in, and 99% of staff in the operating companies are native Africans. As well as training individual staff members and teams we are applying analytical tools to understand why poor margin sites are not performing.

We also ensure our new sites are up to performance and achieving good margins, low capex and high rates of lease up. We have a geospatial tool which we use to recommend build-to-suit sites to our customers which use population density, school and university placements and some other criteria to help us identify the best sites. We know those sites are best because we get lease up rates of 27% on build-to-suit towers which compares favourably with the 17% we achieve on sale and leaseback towers.

TowerXchange: You have entered your fifth market with a joint venture with fibre-experts Vulatel, are you looking at more non-macro tower technologies for future growth options?

Because of our partnership with Vulatel we are interested in the potential of dark fibre and bringing fibre to more areas in South Africa. We’re also looking at edge datacentres, in fact, in the coming months we are going to begin development work in South Africa. Outside South Africa, we are building a small cell network in Ghana and hope to run trials on an active network soon. So we have excellent prospects within our existing markets, but we are also actively looking at new options complementary to our core business too.

The bottom line

• Revenue for the 12 months increased by 3% year-on-year to US$356mn (FY 2017: US$345mn)

• Adjusted EBITDA up 22% year-on-year to US$177.6mn (FY 2017: US$146mn) with FY 2018 Adjusted EBITDA margin at 50% (FY 2017: 42%), up 8ppts

• Q4 2018 Adjusted EBITDA up 13% year-on-year to US$46.5mn (Q4 2017: US$41.1mn) with Q4 2018 Adjusted EBITDA margin at 52% (Q4 2017: 46%), up 6ppts

• Cash and cash equivalents of US$89mn at the end of the year (FY 2017: US$119.7mn)

• US$100mn term loan facility raised to fund future expansion in current markets and opportunities in new markets, specifically South Africa

• Increase in colocations of 5% year-on-year to 6,804 colocations (FY 2017: 6,468 colocations)

• Increase in total sites of 3% year-on-year to 6,745 total sites (FY 2017: 6,519 total sites)

• Tenancy ratio increased by 0.02x to 2.01x (FY 2017: 1.99x)