Fitch Solutions: How attractive are Airtel Africa’s remaining towers?

Four years ago Airtel Africa successfully sold its towers in eleven markets but, conspicuously, failed to sell its passive infrastructure in Chad, Gabon, Madagascar, Malawi and Tanzania. With an IPO in the offing, the arguments for disposing of its capex-intensive towers are as strong as the arguments for keeping them, even if only in the short term. The five markets in which it tried and failed to sell its towers are fiercely price-competitive, but there are other industry- and country-risk factors it should consider when drawing up its options.

Growing demand for mobile data services, supported by the proliferation of low-cost smartphones and the introduction of innovative mobile data offerings, will encourage higher data consumption. This provides an upside risk to Fitch Solutions’ forecasts for 3G/4G adoption. However, heightened political and economic challenges in these markets pose a downside risk to the uptake of advanced services. Operator efforts in this regard remain a long-term investment, one that would be less risky if not burdened by infrastructure expenses.

Airtel Africa had 94.1mn mobile subscribers at the end of September 2018, up by 19.5% year-on-year. The number of data-consuming customers grew by 32.1% over the same period and data usage per customer improved by 12% to 1,113MB per month. However, intense price competition kept blended ARPU in the region of US$3 per month and data ARPU at just US$2.3 per month. Although premium data services such as streaming are available, users tend to focus on lower-value offerings such as messaging and mobile money.

While we anticipate monetisation improvements will continue to be seen, we believe they will still be modest and incremental in nature. Meanwhile, Airtel will need to continue rolling out mobile broadband-enabled towers and base stations and this will offset any gains in revenues. Selling some, or all, of its remaining towers increasingly looks to be an option for the company.

The upcoming IPO poses a dilemma, however. Selling its remaining towers ahead of listing would inflate its cashflow, reduce its capex requirements and allow the company to position itself as a higher-margin service-centric player. On the flip side, retaining the towers would inflate its valuation, enabling it to command a premium from investors. The towers could then be sold on at a later date, further inflating cashflow.

Airtel Africa had its equipment on 20,060 towers as of September 2018, but only 4,449 of these towers were directly owned and controlled. Some of these are located in markets where regulators are yet to consider separately licensing infrastructure and service and some are in markets where dedicated tower companies are reluctant to tread because of macro-economic and political risks or where the market is simply not big or dynamic enough to justify operational costs.

Fitch Solutions’ macro research unit regularly surveys the competitive landscapes in 38 of Sub-Saharan Africa’s telecoms markets and utilises its proprietary Risk/Reward Index to determine the fundamental investment attractiveness of those markets relative to one another. Each market is assessed in terms of Risks (Industry Risks and Country Risks), weighed against Rewards (Industry Rewards and Country Rewards) to arrive at an overall score out of a maximum potential of 100 points.

In 25th, 29th and 30th positions, respectively, Madagascar, Malawi and Chad are the three Airtel Africa markets that fall in the bottom half of the league table with scores of 36.9, 36.3 and 36.2 points out of 100. Subscriber and revenue growth are underwhelming and macroeconomic risks are significant. Tanzania sits in 11th place (43.4 points out of 100), but is held back by growing industry risks including service taxes and mandatory listing of telecoms businesses. Gabon is in sixth place, a result of a very favourable economic growth outlook and improving consumer spending power that sits well with operators’ efforts to upsell value-added services, despite muted subscriber growth in recent times.

In some markets, therefore, retaining ownership of key infrastructure assets may be seen as insulating against sudden risk.

Chad is one of the most challenging markets in Airtel’s operational footprint, reflected by its low score on the Index. Despite the presence of two experienced international players, Airtel and Tigo, Chad supported just 6.559mn mobile subscribers in September 2018, for a penetration rate of only 42.7%, and the uptake of value-added services (VAS) remains muted.

This is further exacerbated by the lack of disposable incomes (estimated at GDP per capita of US$760 at end 2018) which weighs on demand for more than the most basic low-value prepaid services, hindering operators’ efforts to migrate users to premium services. As such, we believe that 3G and 4G uptake will fail to keep pace with population growth, accounting for only 15.2% and 20.2% of the population by 2023.

The regulator’s attempts to entice a fourth entrant into the market have thus far been unsuccessful. The opportunities offered by the country’s low mobile penetration and the lack of affordable mobile broadband services are diminished by heightened operational risks facing operators. This is largely due to recent tax hikes aimed at the mobile sector as the state seeks to plug budgetary shortfalls brought on by sustained economic deterioration. Facing shrinking margins and an increased tax burden, operators lack the incentive to invest in advanced technologies and network expansions, opting to focus on upgrading existing customers instead. We also would not rule out the eventual exit of one of the two larger players, especially if their profitability continues to be squeezed.

Airtel and Gabon Telecom Mobile are the two main mobile network operators in Gabon. Third player Azur had its licence revoked for poor quality of service in 2017, and it appears to be dormant at present; its owners or creditors could yet sell it outright or carve out assets such as towers in an effort to recoup investments. 

Gabon ended September 2018 with 2.889mn mobile subscribers and we only expect the market to grow by 0.7% in the five years to 2023. Nevertheless, Gabon is the sixth most attractive market on our Index. This is owing to a high demand for advanced services which we estimate at 1.552mn 3G/4G users in 2018 as well as estimated ARPUs of US$10, one of the highest in the region. Additionally, years of underinvestment in the country’s fixed line services presents operators with an opportunity to exploit the growing demand for cheaper and more accessible mobile alternatives, among most consumers and small businesses. Operators are also looking to bolster their value added service offerings in response to growing demand for mobile money and media content in the region.

The main risk to our forecast is the country’s economic reliance on exports of commodities. This makes it particularly vulnerable to volatility in oil prices which could impact customer spending on advanced services. The country is also facing increased risks of political violence as ailing president Ali Bongo fends off threats to his rule. A state-imposed internet shutdown in response to an attempted coup in the country in January 2019 highlights a growing trend in the region and may further impact investment appetites.

Fitch Solutions believes there were 10.283mn mobile subscribers in Madagascar in September 2018, a penetration rate of only 39.2%. There remains scope for natural expansion, although reaching the country’s small, isolated communities makes this endeavour more costly. High network expansion costs, coupled with the lack of economic growth means that the service offerings have mainly been limited to 2G and CDMA technologies for a large part of the population.

However, Gulfsat Madagascar’s 2016 entrance as the fourth mobile network operator under the brand Blueline, spurred intense price competition and investment in 3G/4G technologies as incumbents Airtel, Orange and TELMA sought to protect their market shares. The resultant uptake of 3G/4GLTE services has been fairly muted but this has not stopped operators from expanding their networks in the country. Price competition and low per capita income continue to put downward pressure on ARPUs, which we estimate stood at around US$3 in September 2018.

We believe that as the use of 3G/4G services becomes more widespread, it has the potential to lift user spending on networks. Additionally, Fitch Solutions’ Country Risk team forecasts real GDP growth of 4.0% for 2019. However, the elevated risk of political instability following the December 2018 elections may lead to subdued economic activity, placing downward pressure on disposable incomes and discretionary spending powers.

The state also increased excise tax on telecoms services from 7% to 10% in 2016 and would not rule out additional taxation measures should it need to consolidate on the back of slow growth in government revenues. Both scenarios would further extend the time-frame for which operators can begin to recoup their investments into advanced technologies.

Malawi’s mobile market served 6.906mn mobile subscribers at the end of September 2018 but is highly skewed to the prepaid segment which has led to lower ARPUs and multiple inactive subscribers. It remains at risk of volatile subscription growth in the coming years, as the regulator has embarked on an aggressive SIM registration drive, the most recent of which led to the disconnecting of around 1mn SIMs in October 2018.

Nonetheless, we are positive about the prospects for 3G/4G growth as operators focus on advanced and value-added services, mainly mobile financial offerings, as a differentiator. The market ended September 2018 with 3G and 4G users amounting to 3.656mn and 625,000 respectively.

Publicly-listed Telekom Networks Malawi (TNM) invested almost US$26.2mn towards its LTE network expansion in 2017, after spending around US$12.6mn the previous year. Airtel responded by allocating over US$20mn to bolster its high-speed data services over the course of 2017 and launched a 4G LTE network in the country in January 2018. The ongoing capital investments by Airtel and TNM will support a faster uptake of these services despite the network deployment challenges in a country where the rural base accounts for 83% of the population.

With a total mobile subscriber base of 42.12mn at the end of September 2018, Tanzania is by far the largest of Airtel’s remaining markets. Additionally, an estimated mobile penetration rate of only 71.3% for the same period highlights the market’s considerable growth potential.

Vodacom acquired a majority stake in Safaricom in May 2017 and has been bolstering the latter’s VAS offerings in the country, expanding beyond its current Mobile Financial Services (MFS) portfolio into data-centric VAS such as e-commerce and music and video content streaming services. Unwilling to be left behind, rival operators will also look to drive uptake in their VAS services to diversify revenues.

3G/4G uptake has also been robust, on the back of high demand for data services. 3G/4G users numbered 22.87mn in 2018 and Fitch Solutions forecasts this figure to grow to just under 40.72mn in the five years to 2023.

Seven operators currently compete in a market dominated by regional players Vodacom, Airtel and Tigo. However, recently licensed Azam Mobile is expected to launch services soon.

Operators face increasing saturation and competitive pressure among Tanzania’s urban users which only account for 33% of the population. We believe that operators have thus far been reluctant to expand their services into underserved areas, owing to the significant expansion costs, low consumer purchasing power and heightened risks from increasing political involvement in the sector.

In January 2019, Airtel ceded 9% of its share in its Tanzanian unit to the government in a hopefully final settlement to resolve a long-running ownership dispute between the parties. This development comes as telecoms companies face increased operational costs with complying with regulatory rules which aim to have them list 25% of their shares on the Dar es Salaam Stock Exchange.