Description

Helios Towers PLC (HTWS LN)

PT: 230 GBp (50% upside)

Helios is a leading independent owner & lessor of mobile phone towers in Africa, with nearly 15,000 towers spread across eleven countries. It offers a strong value proposition to carriers: providing needed capital while improving network reliability and lowering operating costs. It is simultaneously able to drive excellent economic returns for itself by leasing its towers out to multiple carriers. As the tower market outside of the US institutionalizes and consolidates, Helios is a very well-positioned target – and it is compounding value at a phenomenal rate in the meantime.

This thesis has four key points: (1) the TowerCo business model in Africa emulates most of the features that make the model so attractive in the US; (2) Helios has thoughtfully mitigated many of the risks associated with investing in emerging markets; (3) Helios generates more than double the returns than DM TowerCos, yet is available at less than half the cost; and (4) Helios will ultimately be acquired at a nice premium by a global infra major.

Merits:

• Massive Demand Tailwinds – mobile penetration in Africa is growing rapidly off a low base. Data usage is expected to grow 10x over the next five years. Fixed telco infrastructure barely exists.  Sub-Saharan Africa is over 80% on 2G/3G networks with 4G still nascent and 5G far on the horizon. The tower density (towers per active mobile device) in most African countries is 3-8x lower than the RoW average, while the device per capita penetration is 2x+ lower. In addition to the many normal telco demand drivers, mobile payment has become the main form of banking in many African countries.  The demand tailwinds are massive.
• Barriers to Supply – supply barriers are not as strong as in the US or Europe, though they are better than in some other EMs (e.g., Indonesia). The standard barriers are zoning, NIMBY, and regulatory; though the more important ones in Helios’s markets are regulatory and operational track record-related (see below).
• Strong Credit Tenants – the vast majority of their leases are with strong tenants that are major, pan-African MNOs with IG balance sheets: 31% Airtel, 22% Vodacom, 14% Tigo, 11% Orange, 7% Free, 4% MTN, and 11% other.
• Minimal Currency Risk – the FX risk has been carefully managed by the company: roughly 2/3rds of revenue are linked to USD or EUR.  Half of the remainder is linked to power costs (largely pass-through), while the remaining sixth has CPI protections.
• Excellent Unit Economics (TowerCo 101)
  • mobile towers have high operating margins and minimal CapEx needs, leading to a high conversion rate of revenue into cash flow.
  • Moreover, once you have built a tower for one tenant, there is minimal additional cost to adding a second (or third) tenant onto the same tower, so that rent all drops to the bottom line (this is called colocation). In the US, market rental rate on a new tower will generally work out to a modest 4-6% yield on cost; however, by the time one co-locates a third tenant on that tower, the yield-on-cost can approach 20%.
  • In the US, there are three strong carriers (plus a fourth market entrant in DISH) that all happily co-locate. This makes the potential tenancy ratio high, helping to make the US an attractive market.
  • Different jurisdictions have different wrinkles that give them varying levels of attractiveness. In a few Eastern European jurisdictions, the TowerCo is responsible for the rapidly-depreciating active equipment, creating a business with (theoretically) higher returns, but lower margins and a much higher maintenance CapEx burden. In China, the TowerCo model barely resembles the US model. In India, fickle regulators, financially weak carriers, and contract enforceability issues make it also quite different from the US. Western Europe has traditionally been a weak market due to MNOs' reluctance to co-locate, but that has been changing rapidly in recent years.
  • TowerCo market structure in Africa varies by country, but it is generally quite favorable (and Helios gets to choose which markets to enter based upon how favorable they are). There are two key wrinkles to BTS economics in most African markets. First, the operational intensity means the margins are much lower, but, since much of this OpEx can be shared by tenants, the uplift in cash flow from co-location can be well in excess of 100%. This brings us to the second wrinkle: the regulators in most African jurisdictions mandate that both the first and second tenants receive discounts upon co-location, such that the cash flow uplift to the TowerCo is ~double rather than 200-300%. Further discounts generally do NOT apply for a third tenant, meaning the BTS yield for a typical African Tower goes from ~10% with the first tenant, to ~20% with the second tenant, to ~40% with the third tenant, underscoring the importance of having 3-4 prospective tenants in a market
  • Note that, once you get to five carriers in a market, the carriers tend to get too competitive, leading to bad credit quality for the TowerCo.
  • Nigeria, for example, (where Helios is NOT present) has only two healthy carriers that will co-locate, leading to inferior returns. 
  • In contrast, Helios targets markets with 3-4 colo-friendly MNOs, which is evident in its high (and growing) in-place tenancy ratio of 2.15x.
• Long Pipeline of Accretive Rollup Opportunities – 70% of the towers in Africa are still owned by carriers.  Helios has a big opportunity as an independent acquiror to enter other markets and extend their runway.
• Returns – as noted in the section on unit economics, the returns are excellent, especially for infrastructure: varying from 10-40%+ percent through lease-up.
• Demonstrated Operational Excellence – the operational culture & performance is a key competitive advantage of Helios. TowerCo operations in Africa are much more operationally intenstive, given the lack of electrical grid, while downtime is death to an MNO, driving end customer churn. Helios has demonstrated an ability to run towers with lesser downtimes and lower OpEx than the MNOs they buy from. From 2015 to 2020, they reduced downtime from 20 mins/week to 1 min/week, and they have done this with less diesel fuel cost.
• ESG – for those who actually care about ESG (not just as a box-ticking exercise), Helios is one of the most attractive investments available. They are building & maintaining the critical infrastructure needed to bring the internet & banking services to one billion of the world’s poorest people.  And they are employing hundreds of those people along the way.  And, yes, some of their towers also have nice, shiny solar panels.
• Ownership – Helios has several anchor investors, led by Newlight (Soros) at ~15%.  We think management is solid, but we put more weight on the sophisticated anchor investors, given the importance of capital allocation to this investment.
• Modest Valuation – the market currently values Helios at ~11x forward EBITDA which compares favorably to single-country deals in the region at 9-15x, and the 13x that AMT paid for Eaton Towers in 2019. Helios is even more attractive when you consider its diversity, footprint, and multiple expansion since the Eaton transaction.  Helios is difficult to model because so much depends upon the pace of capital deployment, but we assume $500mn/yr for the next three years at ROICs in-line with historical to get to an exit EBITDA run-rate of ~$500mn. We further assume a 2x multiple uplift in a sale to get to an exit price of ~350 GBp or a 30% IRR. We then discount this back to present at 15% to get a price target of 230 GBp. We think there is material upside to both the exit multiple (better diversity + multiple expansion + deeper bidding pool versus a couple years ago) and to the ROICs (with greater scale comes more leverage + the majority of their markets are new with LOTS of low hanging fruit).
• Attractive Exit Options – given the strategy and the owners, we fully expect Helios to be sold in the next few years to an infrastructure investor with a lower cost of capital.  Likely buyers include AMT, SBAC, CLNX.SM, and private infrastructure funds; as they trade at EV/EBITDA multiples that are more than double Helios’s, there is ample room for a deal that makes sense for both parties.  And, in addition to the day one accretion, the buyer would have an attractive runway of BTSs to deploy further capital into.  There are enough buyers where the size match would be right to ensure robust bidding and a full price. At the same time, we believe Helios is the most attractive EM TowerCo to such a buyer, due to the modest price tag, diversification, and geographic footprint.
• Timely – we think now is an attractive time to enter the stock:
  • the pall of the IHS IPO process (see below) knocked 20% off the price;
  • leasing & pre-leasing activity in Q3 suggest a re-acceleration of growth over the next few quarters after a recent slowdown;
  • they are in the process of doubling their tower count through the purchase of carrier portfolios at 1.2x tenancy ratio versus their in-place portfolio at 2.1x tenancy – this low-hanging fruit should turbocharge growth in the coming 1-2 years; and
  • they have already raised all the equity needed to close these deals.

Issues/Risk & Mitigants:

• Competition – the African market is not easy to penetrate for a new TowerCo. In addition to capital, relationship, and regulatory barriers, operational track record is critical in bidding for portfolios or BTS contracts, as noted above. That said, there are two other independent TowerCos that have demonstrated their capability across multiple African markets: IHS and American Tower (i.e., Eaton Towers). With 70% of towers still held by MNOs, there is plenty for all three. We do expect to see continued multiple expansion, but that is arguably more positive than negative, given that we ultimately expect Helios to be a target.
• Comparison to IHS Towers – African TowerCo peer IHS listed in October 2021 on the NYSE. We believe the listing of IHS was the primary cause of the recent 20% drop in the HTWS LN shareprice because: (a) the IHS listing delivered a supply shock to the thin float of investable EM TowerCos; and (b) the valuation comp to IHS weighted on Helios. We think the comparison is misguided, and HTWS should trade at a MUCH higher multiple than IHS because:
  • Helios is diversified across a number of attractive tower markets, while IHS is 75%+ Nigeria (Nigeria is an “okay” market – it is large and fast-growing; but, taxes are high, it has only two healthy carriers that co-locate, and the economy/investment is sensitive to the price of oil)
  • The relatively high tax rate and MCX burden in Nigeria mean that a dollar of EBITDA translates to less cash flow.  Thus, an apples-to-apples comparison at the cash flow level imply that IHS should be trading at a higher EBITDA multiple.
  • Ownership at Helios is largely composed of sophisticated institutions who are bought into the “rollup-and-sell” strategy (diamond hands!); the only major shareholder looking to exit (Millicom) sold out a few months ago. In contrast, many major IHS shareholders are known sellers (they tried to sell more into the IPO)
  • Management/governance at Helios is highly focused on the strategy of rolling up a diverse profile of attractive African markets for an ultimate sale to AMT/SBAC/infra fund. The CEO of IHS is an empire-builder, and our understanding is that there has been much frustration over strategic pivots – most recently their entry into LatAm.
  • In other words, Helios’s portfolio is being thoughtfully constructed for the most value-maximizing sale a few years down the road, while IHS has assembled a “hairy” portfolio with no exit plan.
• Emerging Market Risks – this is an EM investment, which comes with the related risks. Some of these risks are mitigated through currency, strong counterparties, and by virtue of providing critical infrastructure, but many other risks remain (e.g., investors pull back from EM, confiscatory tax policy changes, etc.)
• Illiquidity – trades just $2mn/day

Catalyst

• Deals under contract close
• Reacceleration of growth through lease-up
• M&A