Description

IHS Holding Limited (IHS) presents an interesting, if somewhat hairy, investment opportunity with at least 40% upside to fair value, and possibly over 100%.

Background:

IHS is one of the largest, emerging markets-focused wireless tower operators, with over 39,000 towers in Africa, the Middle East, and Latin America.

The company operates in 11 countries, and has #1 market share in 7 of those countries. Nigeria is the company’s largest exposure, contributing 67% of revenue, the Sub-Saharan African countries as a group come in second, at 23%, and Latin America as a group contributes 9%.

Like its western peers American Tower or Crown Castle, IHS leases land, builds mobile communications towers, connects or provides power, and rents space to mobile network operators to place their antennas. This has historically been a high-quality business for multiple structural reasons.

IHS went public in Oct 2021 as the largest African-focused company to list in the US. Since the offering, the stock has been weighed down by low liquidity/high insider ownership, macro risks due to the company's high exposure to Nigeria, and shareholder conflict with management over disclosures, results, and representation.

These detractors appear to be improving or are likely to improve, and provide reason to believe the company's structural quality and growth may begin to be better appreciated by the market.

Investment summary:

IHS is a solid growth company with good quality characteristics, trading at a low absolute and relative price and has an improving risk profile.

• IHS has near double-digit organic topline growth potential over the next several years driven by population, GDP, and bandwidth demand growth and technology upgrade cycles

• IHS has structurally high margins and returns on tangible capital due to its dominant market position, zoning and permitting laws, and profitable customers

  • Adj EBITDA margins have averaged over 50% the last 5 years

  • Returns on tangible invested capital have averaged nearly 20%

  • Business has high operating leverage and margin expansion potential from increasing its colocation/amendment penetration

• IHS is cheap, trading at a 19% 2024 LFCF yield,  5.1x ‘24 EBITDA, and 5.2x ‘24 PE

  • Emerging market peers trade at 7-11x '24 EBITDA, a ~40-115% premium

• IHS is gradually diversifying away from its high exposure to Nigeria, thus reducing its macro risk profile

  • In addition, Nigeria’s new government devalued its currency in June and relaxed restrictions on currency exchange, impacting near-term earnings but reducing risk

• Nearly 50% of IHS’s shareholders, including one activist firm, are now publicly pushing for board and operational changes, making a resolution increasingly likely

  • IHS has pulled forward its remaining IPO share unlocks to Oct 14 2023, which will improve trading liquidity

Growth:

IHS’s strong growth potential is driven by attractive economic, demographic, and technological trends. For example, in the company’s most recent quarterly presentation management cites industry growth projections for population, data usage, 4G/5G penetration, and mobile penetration. Each of these trends support robust organic growth over the next 5 years. For example, population growth in IHS’s markets is expected to be 1.4% per year, compared with a global average of 1%. Similarly, GDP growth in these markets is also expected to grow much faster than in developed markets. In Nigeria, for example, Euromonitor projects a nearly 6% GDP growth rate. Furthermore, 5G penetration is only at 1% in IHS’s markets today, compared with 32% in North America, and is projected to grow to 15% by 2027. 

Combined, these drivers have led analysts to project ~9% topline growth for IHS over the next 5 years. 

Quality:

IHS’s business has multiple structural characteristics that drive high margins and returns on invested capital. Zoning and permitting laws make it difficult for new entrants to build sites, and as the largest provider in 7 of its markets, and the sole, 100% market share provider in 5, IHS has significant economies of scale and market power with its customers. This allows it to sign long-term contracts (typically 5-15 years) with limited termination clauses, as well as quarterly FX escalators tied to “hard currencies,” annual CPI escalators, and power indexation clauses which allow IHS to maintain high USD-based margins and topline growth, with some lag, despite the currency devaluations and inflation typical of emerging markets. As a result, IHS has generated margins fairly similar to its North American peers, despite a lower colocation rate, which is an opportunity for margin expansion. 

IHS currently averages 1.5 tenants per tower but has the capacity to increase this significantly. The cost to add an incremental tenant to a tower is about one tenth the cost to build the tower in the first place ($6-10k vs 90k+), yet rents are not discounted to incremental tenants. Hence, increasing the colocation rate drives significant operating leverage. In the most recent earnings call, IHS’s CFO said, “We continue to see no reason why we can’t get to 2 times [colocation rate] or greater on our overall portfolio over the long-term and our more mature portfolios of towers are at or above that rate.”

Because of limited competition and higher market power, wireless tower operators are able to drive higher returns on invested capital per tower in emerging markets than in developed ones where there are multiple established players. IHS has lower build costs, but similar revenues as its western peers per tower. This advantage compounds when IHS increases the number of tenants per tower given the operating leverage. Goldman Sachs, in its initiation report on IHS estimated the following tower portfolio returns based on region and number of tenants per tower:

Because of the operating leverage and capacity for increased colocation rates, operating income should grow several percentage points faster than topline over the next few years.

Lastly, it’s always easier to be a high-quality business with healthy customers. And while IHS is doing well, its customers are performing even better. In the most recent quarter, in the midst of a currency devaluation in its largest market, IHS’s largest customers posted over 20% revenue growth and margin expansion. 

Given these drivers, IHS has generated roughly 20% returns on tangible invested capital in recent years, and should continue to do so.

With stable, growing demand, dominant market position, and strong contracts, IHS is a business that can support reasonable leverage. The company targets a range of 3-4x net debt to EBITDA. The company currently sits around 3.1x leverage, giving it roughly $1 bn of untapped capacity for growth or share buybacks.

Key risks:

The biggest risk presumably weighing on the stock is the company’s large exposure to Nigeria, currently at two thirds of revenue. Nigeria has long had multiple exchange rates and limited foreign reserves, making it difficult to exchange and extract cash from the country. In May, a new president was inaugurated in Nigeria, who has a history of good performance as a regional governor and who has promised many economic reforms. He has already acted on one of those, in removing the currency peg that propped up the Naira in June. The currency promptly devalued by almost 40%. While this will have a small short-term impact on IHS’s results (the company lowered guidance for 2023 by 7% for revenue and 11% for EBITDA), the impact will largely be offset in coming years by automatic FX resets. Furthermore, the new government has acted quickly on other economic reforms which has encouraged western observers, and led to credit rating upgrades. A more open economy and investing environment should reduce the risk premium investors have demanded for a company with high exposure to Nigeria.

And while Nigeria appears to be making progress on internal reforms, IHS is working to diversify its exposure by focusing on inorganic and organic growth in other countries. For example, in 2022, IHS acquired 5,700 towers in South Africa, and 2023, IHS expects to build roughly 1,200 new towers, with the majority of those in Brazil and other countries. The company also has rights to build in Egypt which it continues to consider. And it continues to look at acquisitions, and has a good track record of integrating them, and plenty of untapped liquidity should it find attractive ones.

Another key factor weighing on the stock has been the low level of free float due to insider lockups post the IPO. The company has steadily been releasing tranches of these lockups on schedule and the trading volume has increased, but is still low. In the most recent earnings call, the company announced it had voted to pull forward the final share unlock scheduled for April 2024 to the already-scheduled October 14 unlock, thereby concluding the lockup period for pre-IPO investors. The unlock may cause price volatility, especially as the move appears to be in response to demands from large insiders, but should remove one of the other large overhangs on the stock. 

The final major factor weighing on the stock has been insiders’ displeasure over results, board representation, strategic direction, and lack of disclosure. Blackwells Capital, an activist firm known for taking on Peloton, has gone public with a letter criticizing the company’s lack of disclosure on costs. The letter can be read here: https://www.businesswire.com/news/home/20230628772789/en/Blackwells-Capital-Sends-Letter-to-the-Board-of-Directors-of-IHS-Holding-Limited-Regarding-the-Immediate-Need-for-Governance-Enhancements

MTN, Wendel SE and other shareholders, which collectively own some 48% of IHS have sought, unsuccessfully so far, to obtain greater board representation. See here: https://www.bloomberg.com/news/articles/2023-06-08/african-tower-firm-ihs-in-shareholder-standoff-over-governance 

In July, Wendel sued IHS for failing to notify all of its shareholders about proposals to reconstitute the board of IHS. It hopes to force a vote on the matter. MTN is not a party to the lawsuit but has said it is "evaluating its options." https://www.bloomberg.com/news/articles/2023-07-11/wendel-sues-ihs-over-governance-as-shareholder-fight-escalates 

Bloomberg’s coverage notes that “the board has not agreed to any of the changes [put forward by MTN and Wendel] over fears that they could enable a hostile takeover.”

If Blackwells’ letter is correct, it could be that the underlying performance of the company has been in spite, rather than because of high-quality management, and, perhaps, performance could be improved with structural changes. Given the publicly disclosed efforts by MTN and Wendel, it appears there is a strong coalition of unhappy shareholders pushing for change, and these shareholders nearly represent a majority. The company’s action to pull forward the April 2024 share unlock appears to be an initial response but probably not the final one.

In the context of the low float, currency exposure, and shareholder activism, Citi’s analyst asked in the last call whether it made sense for IHS to remain public. The CEO commented, “We understand we have a float problem. We understand our share price is undervalued. We believe that fundamentally. And I think our shareholders do also believe that. I think we mostly agree on the fact that we need to find solutions… We are open to ideas, we are open to suggestions and we will continue to analyze, evaluate and see whatever works to move us into that direction.”

I think the bet on IHS’s upside in large part depends on how this conflict shakes out. Given the percentage of shareholders pushing for change, I believe the odds favor a resolution that unlocks value. Either the company takes actions which improve governance and transparency, like Blackwells is pushing for, and these lead to share price appreciation, making the large insiders happy, or the insiders grow impatient and take matters into their own hands, perhaps through a takeover, which would also likely create value for holders. 

Valuation:

As noted above, IHS trades at what appear to be attractive, single-digit multiples of forward earnings and EBITDA, and mid-teens or higher yields, and material discounts to other emerging market tower operators. 

Two of the major overhangs on the stock -- Nigeria exposure and low free float -- appear to be ameliorating, and the third -- shareholder conflict -- appears to have a critical mass building, representing nearly half the company’s shareholders, leading me to be bullish on some resolution occurring.

Should these overhangs lift, I would expect the company’s multiple to expand in-line with its peers, which would indicate from 40% to 115% upside on a purely relative basis. Where it should settle out in that range depends on the extent to which single-country exposure is reduced and shareholder issues are resolved which will take some time. In the meantime, the company should consistently grow its earnings and FCF at well above market rates, thus compounding intrinsic value. So, one can be patient in putting a finer point on fair value.

Catalyst

Nigeria continues its economic reforms and the macro risk premium associated with it declines.

IHS continues diversifying away from Nigeria.

Pre-IPO share unlocks on October 14, 2023 increase the free float and provide opportunity for unhappy insiders to sell if they are unable to come to agreement with management.

Either management acquiesces on Blackwells' suggestions or MTN and Wendel's proposals/lawsuit, or the shareholders escalate their battle to unlock value, resulting in strategic action.