Changing priorities for Africa’s public towercos

2023 has been one of the toughest years for the African tower industry on record, with economic headwinds from inflation, interest rates and currency devaluations, combined with supply chain challenges and cross-pressured MNO budgets, putting significant pressure on growth and operational performance.

Helios Towers continues to deliver strong financial results, reporting 39% year-over-year (YoY) revenue growth up to US$721mn as well as a 31% increase in adjusted EBITDA to US$370mn. These growth factors have been driven by the completion of two of Helios Towers’ acquisitions in Oman and Malawi that expanded the group’s MEA portfolio to over 14,000 sites.

Africa has consistently made up 11% of American Towers’ global revenues since 2021, reporting total revenue of US$1.2bn across their global operations. However, ATC Africa saw marginal annual growth of 3%, which was the smallest region of growth across the group’s global portfolio.

Market growth for ATC Africa was also mixed; Ghana has seen steadily revenue decline from US$170mn in 2021 to US$144mn in 2022 and US$129mn in 2023 with the transfer of some towers to Vodafone Ghana following the expiry of a Managed with Licence to Lease agreement signed by Eaton Towers.

South Africa, Kenya and Burkina Faso all declined slightly from 2022. On the other hand, Uganda showed strong growth from US$180mn in ’21 to US$200mn in ‘22 and US$237mn in ‘23. Perhaps surprisingly given the naira’s struggles, ATC Africa’s largest market Nigeria continued to grow from US$477mn in 2022 to US$495mn in 2023.

IHS Towers’ share price had a tumultuous year in 2023. Yet full year results reported revenue growth of 8.4% to US$2.13bn and 9.9% growth in adjusted EBITDA to US$1.13bn. Despite growth over FY 2023, IHS’ Q4 results revealed a 3.1% decline, reflecting a US$271.8mn headwind as naira devaluation fell 75.3% in the final quarter.

In their earnings call, Co-Founder and Group CEO Sam Darwish emphasised that the company was undervalued due to the large recent fluctuations in the naira, and IHS Towers’ strong position to capitalise on Africa’s huge future opportunity for tower infrastructure as the continent’s largest towerco.

African currencies have had a rough ride over the past two years, with key currencies such as the Ghanian cedi, Kenyan shilling and South African rand all down, and the Nigerian naira trailing as the worst-performing currency against the US$ since the start of 2022.

IHS Towers reported that the naira had devaluated 246% from January 2023 to March 2024 due to the Nigerian government unifying the exchange rate, removing petrol subsidies and attempting to control inflation.

While these were all positive factors that showed the government is attempting to tackle economic turbulence and rampant spending, it led to a US$271.8mn YoY foreign exchange headwind for Nigeria’s largest towerco.

With 63% of revenues in Q4 coming from their Nigerian operations, IHS Towers remains highly exposed to their home market despite attempts to diversity their portfolio via acquisitions and expansion into MENA, Latam and other African markets.

American Tower also reported significant losses of US$235.9 from their African operations due to currency devaluation. This included US$148.2mn due to naira, US$45.4mn to the Ghanaian cedi, US$22.4mn to the Kenyan shilling and US$20mn to the South African rand. Only the CFA Franc marginally offset this changing favourably by US$2mn.

The collapse of the naira from 460 per US$ to 1,500 US$ over the course of a year compared to American Towers’ prior guidance rate of 850 put heightened risk on one of the group’s largest overseas business units.

Helios Towers fared better due to their more diverse portfolio and less volatile markets. Despite this, the group still felt the impact of high inflation, seeing 4% foreign currency movements against the dollar across their markets. Helios Towers also reported interest payment increases from US$97.7mn in 2022 to US$127.9mn in 2023.

SBA Communications has a much smaller presence in Africa, with just 2.4% of their global site leasing revenue coming from South Africa and Tanzania, meaning their group-level exposure was marginal. However, SBA South Africa has all their revenues from their South African lease contracts in rand, leaving the local business unit less exposed to currency fluctuations.

Despite these losses from currency devaluations, organic growth was high across the board. IHS Towers saw 36.9% organic growth due to FX resets, CPI escalations and new lease agreements, with 46.5% organic growth in Nigeria and 15.9% in the rest of their African markets. Inflation peaking at 29% meant the average CPI rate increased to 24.7%, so despite a 10% YoY decline in US$ earnings revenue grew significantly from contract escalators.

IHS Towers also reported US$11bn currently under contract with an average tenancy length of 7.5 years having re-signed with MTN Cameroon and Cote d’Ivoire. The group also renewed and extended their contract with Airtel Africa, helping to secure a strong pipeline of long-term revenue.

Helios Towers also saw organic revenue growth of 17%, although most of this (10%) was due to new lease agreements. Power escalations contributed 6%, CPI escalators 4% and FX rates 3% respectively.

While Helios Towers avoided the turbulence of the Nigerian market entirely, and only have a small presence in South Africa, the towerco also has 64% of revenues earnt in hard-currency (55% US$ and 9% CFA Franc) in addition to hard-currency CPI and power escalators that helped largely mitigate devaluation and inflation. Helios Towers also has a strong pipeline of US$5.6bn in contracted revenue with an average remaining life of 7.8 years.

For American Tower, Airtel Africa and MTN Group make up 84% of their Africa property segment revenue, putting their contracts in safe hands with large multinational MNOs. However, part of their increase SG&A (selling, general and administrative expenses) was “an increase in bad dept expense” and stated impairment charges of US$90mn relating to impaired tenant relationships in Africa. TowerXchange understands that Telkom Kenya and Smile Communications Uganda are in arrears.

A significant chunk of ATC Africa’s revenue (US$126mn) was pass-through primarily due to increasing energy costs, with FX protections and escalators contributed US$102mn.

SBA Communications state that in South Africa all their revenue, expenses and capital expenditures are denominated in local currency, while in Tanzania this is denominated in a mix of local currency and US$. These markets do have inflationary index-based rent escalators to mitigate this, but SBA still highlights the exposure they have in these markets.

With rising interest rates, debt has become more expensive. IHS Towers reports a 3.4X net debt which is expected to further increase over 2024 due to further devaluation of the Naira but remain within the expected 3-4X range. To mitigate the cost of this debt, IHS transferred some of this into a local loan in Cote d’Ivoire, and plan to shift more of their debt into local currencies.

Helios Towers have reduced their net leverage by 0.07X to 4.4X, somewhat down since their acquisitions in Oman and Malawi. Helios also tendered US$325mn of their December-25 Bonds, extending average maturity by 1 year with minimal increase in cost of debt. By the end of 2024, the group plan to reduce this figure to below 4.0X, de-leveraging down to 3.0X by 2026.

American Tower reports a US$9.6bn liquidity pool to drive M&A and maintain their position that they continue to explore opportunities for expansion. ATC also recently sold 100% of their India unit to Brookfield for US$2.5bn expected to close in H2 2024, meaning the group will have a large pool of capital that could be used on new investment opportunities. Alternatively American Tower may choose to further reduce debt to reduce its 5.2X net debt.

Increasing costs of capital and smaller operator budgets led to a slow-down in M&A and new builds in 2023, but towercos are looking increasingly at growing organic tenancies to drive revenues and productivity from existing assets.

IHS Towers’ contract extension with Airtel Nigeria will add 2,950 new tenancies over the next five years, increasing their tenants by 2% to 59,726 and driving up their tenancy ratio by 0.01X to 1.49X. The group saw a spike in returns over invested capital in 2023 with US$600mn capex allocation going mostly towards cost-saving benefits. IHS has seen success with its US$100mn Project 100 spent on energy efficiencies, achieving US$24mn in savings so far.

Helios Towers signed 2,433 new tenancies over 2023, increasing YoY tenancy ratio by 0.1X up to 1.91X across their whole portfolio. The towerco also plans to add an additional 1,600-2,100 tenancy additions in 2024 and by 2026 to achieve a 2.2X tenancy ratio to push up returns on investment capital. As a result, capex for site upgrades increased significantly from US$16mn in 2022 to US$25mn in 2023, partly owing to investment in their new Omani and Malawi portfolios.

In response to currency losses and increasing operational costs, IHS Towers announced it is heavily focused on improving efficiencies, exploring how AI can be utilised in tower operations.

IHS Tower saw only a small amount of new tower builds in 2023, growing at 1.1% across their 40,075-tower portfolio, with most of these being deployed in Brazil as the group focuses on allocating capital to more predictable markets. However, IHS Towers did see strong growth in its fibre business across Nigeria with GICL completing the rollout of 10,000km of fibre optic cables at the start of 2024.

Helios Towers is working towards achieving 22,000 towers by 2026 driven both through M&A and organic growth, but the towerco stated that BTS was an effective form of allocating capital to achieve good returns on investment, in addition to co-locations and operational efficiencies. Around 500 new sites were built in 2023, making up 4% of their entire stock. However, capex in organic growth did decrease from US$171mn in 2022 to US$113mn in 2023.

ATC Africa saw the highest number of new sites at 1,590, making up 47% of all the new sites acquired or constructed by American Towers group in 2023. Both Nigeria and Uganda are seeing high rates of new builds owing to densification strategies for 4G and emerging 5G by operators. ATC Africa reported US$141mn in tenant billing earnings, driven predominantly by colocations as well as contract amendments.

Economic turbulence in Africa is expected to continue into 2024, although it is hoped that the painful currency adjustment will allow Nigeria to stabilise. African towercos have continued to demonstrate strong organic growth, driving up tenancy ratios across the board and mitigating against lost revenues.

But while contract escalators helped keep revenues secure, these have passed on significant costs to their customer who are finding network budgets stretched thin. Big MNOs such as Airtel and MTN have enough scale to absorb these costs, but smaller operators have defaulted on payments and have previously had to exit markets or be acquired.

Operators are likely to turn to co-locations as a solution to this, as infrastructure sharing reduces tenant and energy costs via sharing infrastructure. A continued focus on operational efficiency, with all the towercos exploring solutions that can automate operations and deliver cost-savings, will also help make tower networks become more financially sustainable.