By Duncan Mlanjira
As soon as Airtel Malawi released the Initial Public Offer (IPO) intending to list on the main board of the Malawi Stock Exchange (MSE), several professionals in the financial services industry, mostly in their personal capacities, wrote their opinions on the pros and cons of this latest development that is inviting the public to be shareholders.
Initial observers, however, first sent red flags trying to dissuade the public from rushing to buy the shares, which are going at K12.69 per share.
Two certified accountants, who went through the IPO Prospectus that Airtel released on December 27 and is open up to January 31, observed that the Balance Sheet position indicates that Airtel is in so much debt.
They said it currently sits in a net liability position of approximately K42 billion.
“Recall the Balance Sheet formula (Assets = Equity + Liabilities),” went on the analysis. “To be in a net liability position this happens E = (A-L) where liabilities are higher than assets.
“In simple language, that’s not a good thing. It’s never a good thing when you have more liabilities than assets, accountants will always say.”
They went on to say the structure of Airtel favours the holding company Bharti Airtel.
“This is for tax planning purposes and profit maximisation strategies from Bharti Airtel’s perspective. According to the prospectus, Airtel Malawi does not have a stake in Airtel Towers Ltd and Airtel Mobile Commerce Ltd.
“Any revenues from Airtel Money or Airtel Towers will not form part of Airtel Malawi Ltd revenues. We will not get into issues of transfer pricing for now.
On the debt to equity ratio, the two accountants, who did not want to be mentioned, said total shareholders equity as at June 2019, stands at K1.8 billion whilst total liabilities stand at a whooping K124 billion.
“Let’s unpack this — Airtel Malawi has 3 massive debts. One to be repaid within two years to Bank of America (K30bln) and one to be repaid long term to Bharti Airtel at (14bln).
“The rest are short term trade debts (43bln), lease liabilities (13bln) and others.
“That values the company at approximately K139 billion. In comparison, from what we have quickly gathered, the market capitalization of TNM with approximately all 10 billion shares in issue on the MSE is about K260 billion.”
They analyzed that according to the TNM website, Press Corp is the majority shareholder of TNM with ‘other’ shareholders making up 38% shareholding. TNM therefore has a market price of approx K260 billion.
“Interesting enough, the valuation of Airtel is approximately half of TNM’s value. The IPO share price of K12.69 is also approximately half the stock price of TNM’s at K26 per share.
“Is Airtel worth half of TNM? To decide whether to buy Airtel shares one needs to answer a simple question according to the wisdom of Warren Buffet. If you had K137 billion right now, would you buy the company?”
They analyzed that Airtel remains the leading company in terms of customer base ahead of the major competitor TNM. However, TNM surpassed Airtel in terms of revenue in FY 2018 by approx K4 billion, standing at K88 billion and K84 billion respectively.
Thy said Bharti Airtel positioned itself to be paid first as a creditor and then also be paid last as an owner. The BOA borrowings may explain the sharp decline in retained earnings over the years which has affected dividend payouts.
“The proceeds that will be realised from this IPO will go to Bharti Airtel as a sale of shares and not a capital raising to address its net liability position.
“Recall MPICO had a rights issue recently to raise capital specifically to settle it’s debt obligations that were massively consuming it’s revenues.
“That was a smart move, and it’s stock price doubled after the issue. This is not a similar case.”
Is it a good buy?
“No. Not in its current form. I would wait for Airtel to reduce its debts and have a healthier balance sheet. Of particular concern is it’s trade debts (43bln) and the BOA short term debt at (30bln).
“Its revenue growth and forecasts are encouraging but the revenues realised are being swallowed by debt obligations amongst other costs.
“It would be interesting to assess its position after the BOA debt is settled in 2 years.
Will you miss out?
“The fear of missing out is expected. The market can sometimes act irrational by mis-pricing the shares after an IPO. The share price could sky rocket since Malawi has a shallow market with excess funds constantly searching for the next opportunity.
“Speculation could push the price up but any rational investor would not anticipate a short term rise in Airtel share prices.
“I recently stated that ICON Properties is over priced and has a ‘tiny’ return on assets and it seems the market has not pushed its price further. Perhaps the market will be rational and treat Airtel shares with caution aswell. It’s hard to tell.
“In conclusion, becoming an owner of Airtel Limited valued at half the price of TNM is a pass and wait for me — This is not investment advice.”
However, NICO Asset Managers’ Chief Investment Officer, Daniel Dunga came to the defence of Airtel, saying Stock Market is for the long future.
“Unfortunately nobody knows the future for sure, not even tomorrow. So don’t buy based on this or any Facebook advice — but most importantly how are you investing in your future?
“If you use an Airtel line, then just BUY. You already trust Airtel. It’s just K12.69 please. Get a few and earn the right to receive annual reports. Wouldn’t it be nice to walk around as one of the owners of Airtel? Come on!”
First things first, Dunga said, don’t ever buy shares for short term speculative trading i.e. buying today with the hope of selling next month at a profit, you will most certainly lose. Others do it, but don’t do it in a small market like ours.
“Now Airtel is offering its shares at K12.69 per share. The question is what do you think the share price will be in 2025 or 2030? Can you commit money for that period? Are you happy with the return you think it will give? Can you make a better return elsewhere?
“My answer is in 5 to 10 years time you will be so happy you ever invested in this stock. Regardless of what you think today.”
Dunga, whose company is advocating in Private Wealth Management on how people can prudently invest their money in order to receive meaningful returns, cautions the public to first be sure that they have read the documents yourself.
“Don’t listen to people who have also just heard. Better still, speak to an investment advisor.“
Too much debt
Indeed there is too much debt. But how are companies of this nature financed? Have you checked?
“All over the world capital intensive business like these are financed by debt. It is very normal for a telecommunications company to be highly geared. Lenders are more than happy to provide more debt.
“Why? Because these are money minting machines. They can always service their debt. So there is no issue here.”
In comparing with TNM, Dunga opines that the competitor is better but it is still highly geared, and it will be even more geared in future.
“In 2018, TNM had current assets at K19bln and current liabilities at K25bln. If they wish to expand they will definitely borrow more. But TNM has been one of the best stocks on the MSE.”
Related to the above, in Capital Theory (Modiglian and Miller) it is argued that capital structure is irrelevant to the valuation of the company. (Google Capital Structure Irrelevance Theory).
“Any company can be financed by any capital structure as long as the company is profitable. In this industry capital structure is irrelevant to the valuation of the company. The real question is, is the entity profitable?
“On Airtel, please look at the revenue and EBIDTA and Profit. Have you looked at the numbers? This is a money minting machine whichever way you look at it.
“See the number in the extract attached. EBIDTA: K21bn in 2016, K41bn in 2019, K50bn projected for 2020. Same trend on Revenue: K71bn, K94bn, K107bn. These are big numbers for any business.”
Use of IPO proceeds
“This is an easy one. If you are selling something you get paid for it. You take the money. Period.
“If the money goes back into the business, it won’t be possible to reduce shareholding to 80% which is the purpose of the listing. It’s a bit complicated but that’s the point). Seller gets the cash. This is not a capital raise. This is a sell.
On Asset stripping, Dunga said this is arguable and it would have been nice to have the whole piece in one place. But it isn’t.
“There are reasons given. Again we can debate. So what to do? Value the piece that’s being offered to you. Are you happy? If yes BUY. If no, DON’T BUY.
“It’s like this, I am selling the skirt and the jacket separately. But for now the skirt is not for sell, so get the jacket only. It would be nice to buy the whole outfit. But since it’s the jacket only on offer, are you happy with the price of the jacket without the skirt?
“If the capital structure of the business is highly geared, the question is, can the company ably raise more debt in future? If the answer is Yes (which I think it is for Airtel) then the going concern question has an answer.
“The real people to be worried are the lenders. But they aren’t. Not for a second. The Bank of America loan is unsecured. Can you imagine that? Unsecured!
“And these guys would be more than happy to roll over! If they don’t, others lenders are reeling to take this over. Trust me. So? What’s the issue here?
“Is this the correct price? That’s a tough one. My simple guidance is how similar or different is the business being listed to a similar listed company? The easiest is TNM.
“How do things like revenues, profits, total assets, and market share compare? The truth is, they are neck to neck similar.
So how does K12.69 compare to K26? Favourably I would argue. So? BUY! Well speak to your investment advisor first. This is just guidance,” he said.