Should investors buy Airtel Africa shares today?

Airtel Africa (LSE: AAF) shares added to FTSE 100 last year’s index. But since then, he hasn’t done well.

Are shares worth buying today as they are trading at low prices? Let’s talk about it.

Four reasons to buy

Looking at Airtel Africa today, there is a lot to like about the company from an investment perspective, in my mind.

For starters, the company has considerable growth potential. Airtel operates in 14 countries in Africa including Nigeria, Kenya, and the Democratic Republic of Congo, providing mobile data, voice, and banking services. And in these African countries, the demand for these services is growing rapidly.

This is reflected in recent trading updates. For the first nine months of the financial year ending March 31, the group reported:

• Total subscribers 138.5m, up 10.1% year-on-year
• Revenue growth (in constant currency) of 17.3%
• Mobile money revenue growth of 29.8%

Second, the company is quite profitable. For the first nine months of the financial year, the return on capital employed was 23.3%. Meanwhile, over the last three financial years, the average was 17.2%. Companies that generate a high return on capital have more money to invest for future growth.

Third, the company pays decent dividends. Last year, Airtel paid a total dividend of five cents per share. At the current share price, that translates to a yield of almost 4%.

Finally, the price is quite low. Currently, Airtel Africa shows an expected price-to-earnings (P/E) ratio of just 7.1. To put these numbers into perspective, the median P/E ratio in the FTSE 100 is currently 13.3. So it looks like there are some prices on offer here now.

Risk

Having said all that, there are some risks to be aware of here. One of them is rising costs.

Telecom is a capital-intensive industry and in the nine months to the end of 2022, Airtel’s capital expenditure increased by 6% to $457m. Higher costs can be profitable.

Another is competition. Some of the competitors here include MTN, Vodacom, and Orange. MTN is the largest telecommunications company in Africa and my research shows that it has a stronger brand than Airtel.

Of course, we cannot ignore political or macroeconomic turbulence in the company’s main market. African economies can be more stable than developed markets like the UK and the US.

“We are constantly faced with uncertain and evolving legal and regulatory requirements in some of the markets in which we operate.”, the company wrote in its latest update.

My view

Expanding on all this, what I would like to say is that Airtel Africa shares are now worth watching. I am offering value.

However, given the risk, this is not a stock I would go with. I kept my position small and bought more stocks for diversification.