Since its lows in May last year, the Airtel Africa (LSE: AAF) share price has tripled in value. This is mainly due to its recovery from the pandemic, as highlighted by a series of excellent results. Today was no different, with the FTSE 250 stock reporting profit before tax growth of 101% for its latest six months. This has seen the Airtel Africa share price rise over 10% today. As such, following the trading update, I’m very tempted to add more Airtel Africa shares to my portfolio. Here’s why.
Trading update
The half-year trading update was strong across the board. Indeed, in comparison to the same period last year, revenues were 25% higher at $2.272bn. Further, the group saw revenue growth in each of its different segments, with mobile money showing particularly robust growth of 42%. This demonstrates that the company is still growing quickly.
And unlike many other growth stocks, Airtel Africa is also recording strong profits, and it said profit before tax totalled $567m. As already stated, this is a 101% increase on last year’s results. As profits rose quicker than revenues, it shows that the company is improving its operating efficiency. This is a good sign for the future, and hopefully, profits can continue to grow.
The group’s current profitability also means that the stock trades on a cheap valuation. In fact, using these results, Airtel Africa has a price-to-earnings ratio of around 9. This is lower than a large majority of other FTSE 250 stocks, and ratios under 10 often indicate that growth is either slow or negative. As this doesn’t seem the case with Airtel Africa, I feel that it’s undervalued.
Other factors
Nevertheless, this low P/E ratio may reflect some of the risks associated with the group. For example, while Africa is seen as a high-growth area, it’s also seen as very unpredictable. In fact, Sub-Saharan Africa has recently experienced a third wave of coronavirus, caused due to vaccination levels remaining very low. Many African currencies, such as the Nigerian naira and the Zambian kwacha, have also seen devaluations recently. Both these factors may have a negative impact on Airtel Africa, something which makes it riskier than some other FTSE 250 stocks.
But I’m confident that it can cope with these problems. For instance, the company has managed to consistently grow its customer base, which most recently reached 122.7m. The balance sheet has also been steadily improving, and net-debt-to-underlying EBITDA is now only 1.5x. I feel that this is sustainable.
What am I doing with this FTSE 250 stock?
Airtel Africa makes up the largest part of my portfolio, and I’m still tempted to buy more. Its growth is excellent, and it’s accompanied with a dividend of around 4%. Its subsidiary, Airtel Money, is also delivering excellent growth, and this has prompted an investment from Mastercard. As such, while there are no doubt risks associated with this stock, there are too many positives to ignore in my view. Therefore, I believe that Airtel Africa is a ‘no-brainer’ buy for me so I may buy more.
Stuart Blair owns shares in Airtel Africa. The Motley Fool UK owns shares of and has recommended Mastercard. The Motley Fool UK has recommended Airtel Africa Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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