A great asset with strong secular growth prospects has gone from trading at a good price to a ludicrous price well in excess of what the move in rates alone would justify. We think you can generate an exceptional return here just from the growth and capital return opportunity, but the prospect of a rerating towards peers or a bid from a large acquirer also adds enormous positive event risk into the mix.

 

 

 

Helios Towers (HTWS LN) was last written up on VIC in November of 2021 by blaueskobalt. It is a very solid write-up that accurately covers a bunch of the company's long-term merits. However, we believe that the subsequent sell-off in risk assets (especially EM assets) has inappropriately orphaned this gem of an asset.

 

Fundamentally, the picture has only improved. Since that time, the company has grown EBITDA by 50% (FYe23 EBITDA of $360mn vs $240mn in FY21) with an improving organic growth profile. How has the stock done? Well, HTWS' Enterprise Value has declined by -26%, which equates to a stock decline of -33%. 'Big deal!', you might say, 'rates have increased massively since then'. Which is fair enough, except for the fact that the stock has derated from 11x EV/Fwd EBITDA - hardly expensive for a towerco - to 6.5x EV/Fwd EBITDA (including additional net debt for Oman). Bluntly, that is a ludicrous valuation for this sort of asset, especially with HTWS' line-of-sight organic growth, and is totally out of keeping with what these assets would go for in a transaction.

 

For reference, industry leader AMT's EBITDA grew by 26% using the same methodology while its stock was down 15% and its EV is down only 8% since the last HTWS write-up. Using the same EV/Fwd EBITDA calculation, AMT's multiple has only declined from ~26.5x to 21x and this is despite the fact that AMT is roughly twice as levered as HTWS and HTWS has superior organic growth prospects. We think this clearly puts the lie to the idea that the discrepancy is simply a matter of rates moving and the pricing of Helios' 2025 bonds tells a similar story (mid px YTM has only increased by 300bps since Nov '21, bonds trading near par). If you accept the premise that these are thoughtfully derisked contracts with attractive economics in markets that are early into an attractive growth profile, the risk/reward profile more than takes care of itself. The recent Vantage Towers deal (23.6x TTM EBITDA) or the rumored Cellnex deal (21.2x TTM EBITDA before a premium) further reinforce what lower growth assets trade for in admittedly lower-risk jurisdictions despite substantially higher rates.

 

 

 

The company has not materially changed since the Nov '21 write-up but, in brief, Helios is a tower company with operating entirely in Africa and (as of recently) the Middle East. It has roughly 15k sites with an average tenancy ratio of 1.7x as of 3Q22. However, that ratio is heavily influenced by the fact that Helios is an active acquirer of MNO portfolios and, as a smaller driver, engaged in a large number of newbuilds. Both factors skew the tenancy ratios lower but HTWS has a consistent track record of leasing them up.

 

 

HTWS is present in 10 markets today, with Tanzania and DRC as its largest markets (30% of revenues each) followed by Oman (9%), Ghana (6%) and Senegal (6%). These are all good to very good markets in terms of number of MNOs, their competitive intensity, demographics and rapid increases in smartphone usage as well as data consumption. Over the past 12mos, for example, network traffic habitually went up 50% to 100% for leading local carriers! Helios will not grow anywhere close to linearly with network traffic, of course, but increased activity will necessitate new access points (BTS) and better tower infrastructure on existing sites (lease amendments). HTWS is usually the #1 towerco in its markets. Tower density per subscriber is mostly a small fraction of what it would be in developed markets (irrelevant for today but pointing to long-term BTS opportunities). MNOs often still have tower portfolios to unload (~70% of towers across Africa are still carrier-owned) which points to in-market tuck-in opportunities. And all of this is in the context of 'hard currency' (typically USD/EUR) denominated contracts for ~75% of EBITDA with an average lease life of 8yrs (non-renewal is vanishingly rare).

 

 

Operational skill is a real difference-maker given the aggregate infrastructural realities of the African continent today:

 

 

HTWS is a demonstrably superior operator vs the MNOs keeping this in-house and that can be a crucial difference-maker for the MNOs competitively:

 

 

It's hard to overstate what we see as the growth drivers here: populations are growing fast by global standards and skew extremely young (e.g. average age in Tanzania is ~18) meaning that there is structural growth in subscribers across networks, most subscriber bases are only 30-50% penetrated with smartphones and 4G usage is extremely early. All of this translates into a need to radically improve and densify these networks over time. Towercos like HTWS should be logical beneficiaries. Above and beyond the normally acyclical drivers of a towerco, we think this heightened demand is likely to be structural for many years to come and, as evidence, we would point to the strong subscriber growth and data traffic the African MNOs have been experiencing over the past year despite what is perceived to be an exceptionally tough time for the consumer in many markets due to inflation driven by the invasion of Ukraine.

 

 

In light of this, organic growth at HTWS has been particularly strong over every quarter of FY22 so far: 10%, 12% and 14% organic revenue growth for 1Q , 2Q and 3Q respectively. Some of this was driven by FX/Fuel catch-ups but Organic EBITDA growth has been ~10% all year so far as well - and this is despite recent acquisitions and integrations lower tenancy ratios and EBITDA margins. We think the EBITDA growth will ultimately converge with and even surpass revenue growth as HTWS is able to lease up its tower footprint.

 

At the end of the day, this is a standard 'good' towerco opportunity, just in a geography that many won't give the time of day today. The lease-up opportunity for HTWS is compelling:

 

 

 

 

 

We like them a lot, including the new CEO (Tom Greenwood) who replaced the long-standing prior CEO (fantastically named Kash Pandya). Operational and capital allocation is strong. Willingness to pass on big deals where the protections are not sufficient is comforting. They have watched what works for other towercos and seem keen to emulate them. The excitement around the Africa opportunity is still strong. Perhaps most importantly, they own stock outright and periodically buy in the open market!

 

When you compare them to IHS (the other publicly traded African towerco), the difference in focus is night and day. IHS is all about elephant hunting and empire-building. They are cognizant that they get a single-country discount by being so big in Nigeria and are trying hard to 'fix' that but are seemingly shifting away from towers and tight contracts in the process. That stock is also extremely cheap but it has company-specific issues that really underline the strengths of the HTWS team.

 

Note: We would encourage anyone interested to watch HTWS' 2022 Capital Markets Day. In addition to being a really good presentation about how a towerco works, it also gives plenty of time to see HTWS management in action

 

 

 

 

- FX and Fuel prices are subjects of focus but these are mostly passed through on a lag. This has led to some confusion in terms of e.g. margin but we think the company has done yeoman's work in terms of trying to explain these contract provisions.

- Leverage is very modest by the standards of a towerco at just over 3x net debt to EBITDA before the Oman transaction. We think HTWS will end FY23 at roughly 3.3x Net Debt/TTM EBITDA even assuming zero net cash accretion.

- Economics of rural deployments may be inferior to HTWS sites close to population centers

- Exposure to DRC and Tanzania is high (although it will go down as further markets are acquired) but towers are physical infrastructure that typically has universal buy-in and minimal incentive to interfere. Whether it's local politicians or combatants in a conflict, no one wants to have to explain to locals why they took away their access to WhatsApp and so uptime has been immaculate across markets. Downtime per tower per week for HTWS was one minute and ten seconds in FY21. We fully concede that the spectrum of bad things is broader in an emerging market but presumably that should be weighed against a much larger and longer-duration growth opportunity.

- Customers are strongly profitable and usually very lightly levered, non-payment is not a serious risk.

 

 

To address a broader point, when a business has minimal credit or currency risk and is not beholden to local EM capital markets, it's not clear to us why that business' cost of capital shouldn't reference global standards as opposed to local. That's not to say that HTWS should trade at parity with AMT! We fully agree that Helios' portfolio should trade at a significant growth-adjusted discount to a portfolio in developed markets, but we feel that this discount has become wildly excessive. Sites1 in Mexico and TOWR in Indonesia both trade at 10x EBITDA despite inferior colocation opportunities, limited scope for margin improvement, more mature telecom industries, de minimis core M&A opportunities and zero geographic diversification. These assets are arguably fundamentally cheap as well! But HTWS, seemingly orphaned as an African company listed in London and reporting in US dollars, trades at a significant discount even to these despite HTWS' natural long-term advantages vs these other EM tower champions.

 

The company's experience in Tanzania is telling, we think:

 

 

 

We are optimistic about HTWS' market opportunities and think they can organically growth US$ EBITDA well into the teens for many years to come. We think it has numerous tuck-in opportunities that are too small for the giants but still consequential for HTWS. We think the risks are materially overstated and the valuation is astoundingly low both on the fundamental merits as well as comps. HTWS has only been trading since 2019 but this is also its lowest EV/Fwd EBITDA ever, surpassing even its Covid lows. Finally, if the interest of the towercos ever shifts back away from Europe to Africa, HTWS represents a bite-size opportunity relative to the global giants.

 

 

In terms of prospective upside, we think you can see high-teens IRRs to the equity even with no rerating simply because of the strong organic EBITDA opportunities. If the company is ever acquired, the tight shareholder base and informed management team means there is a good chance that there could be a bonanza-type rerating.

 

 

- Continued strong organic results

- Further M&A interest in the space