For those who have been investing in the stock market for a while, there are clearly some FTSE 100 stocks that are more popular than others. Some of these take the limelight due to resilience and quality fundamentals, with others taking headlines due to volatility.
With my portfolio, I look to block out the noise and hype, focussing only on the fundamentals and execution of the companies I invest in. One of these stocks that caught my eye recently is Airtel Africa (LSE: AAF).
Strength in an emerging market
Airtel Africa supplies the following telecommunication and mobile payment services across 14 countries in Africa:
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- Prepaid wireless voice;
- International roaming;
- Data communication services;
- Digital wallet payments systems, microloans, savings, and international money transfers;
- Messaging;
- On-demand and live TV;
- Infrastructure sharing services;
- Handset sales.
Telecoms within the emerging market space is clearly an area that has enormous potential. Growing populations look to adopt technology for business and leisure. Airtel Africa looks to have a sizeable proportion of this market, with over 128 million customers.
With less than half of adults in Africa having a bank account, there also looks to be an enormous market to expand the financial services of the continent.
Company fundamentals
As an investor, it is vital to establish how much this potential has been priced into the share price. In the last year, Airtel Africa shares saw a 21.7% decline. This lags the UK market, but is in line with the telecom industry.
When considering the fundamentals, the price-to-earnings (P/E) ratio of the company at 8.3 is superior to the sector average of 13.5. By considering the future cash flow of the company using a discounted cash flow model, the fair value of 500p is notably higher than the current price of 116p.
Where things get interesting is the return on equity (ROE). This indicates that Airtel Africa uses shareholder investment to generate profits at twice the rate of the industry, at 20.9% versus 10.8%.
Other important financials, including debt levels, seem to be sustainable. And despite the company having a lower dividend yield than the sector average (2.9% versus 8.8%), I would be content that the company is using cash to grow instead of paying out to shareholders.
Another key indicator of confidence is the balance of insider transactions, with no shares sold, and over 185,000 shares bought.
What’s next?
The sector is highly competitive, potentially resulting in declines to future profit margins. But when compared to the wider telecoms sector, having exposure to such a large population in an emerging market gives a clear advantage in terms of the prospect for future growth.
The fundamentals indicate the company is in a resilient and stable position to withstand challenges in the near term. And with such an extensive market, there is likely to be room for several companies to succeed. On that basis, and my analysis suggesting that the company is undervalued, I will be buying more shares.
