As a shareholder in telecoms company Airtel Africa (LSE: AAF), I’ve found the share price chart lately has made for gloomy reading. Over the past year, the share price has tumbled by 34%.
I did not own the shares a year ago. I bought in during the fall, seeing value in the stock. But they have now fallen below the price I paid for them!
Could the Airtel Africa share price fall to less than a pound – and what should I do about it?
Key challenge
The key reason I had previously hesitated about buying into the company was the risk associated with doing business in frontier markets like Nigeria and Kenya.
At some point, I felt such risks were already compensated for by the share price. After all, Airtel Africa is a booming business and currently trades on a price-to-earnings ratio of just eight.
But it turns out I was right to weigh the risks involved.
A depreciation of the Nigerian currency threatens to play havoc with the company’s earnings. Its customers there pay in the local currency but the company reports earnings (and pays dividends) in US dollars.
That means a worsening exchange rate could badly hurt reported profits, even if they remain the same as before in local currency. That is exactly the sort of currency risk that often puts me off investing in frontier markets.
Share price risks
The stock market does not like this kind of uncertainty.
The shares have been marked down 10% since a company announcement last month about the possible impact of the Nigerian exchange rate on earnings.
Nor is this a minor risk: Nigeria is Airtel Africa’s biggest market. A lot of my bullishness about the company has been based on the growth potential for its mobile money services, notably in Nigeria.
For now the Airtel Africa share price is still above a pound and has gained a bit of ground in recent days.
What happens next?
Over the past year, the Nigerian currency has lost almost half its value relative to the greenback. If we see more negative exchange rate news from Nigeria – or another large market – that could scare investors even more about the earnings outlook for Airtel Africa. If that happens, I could see the Airtel Africa share price potentially falling to less than a pound.
That would be a case of back to the future – as recently as 2020, a pound could buy almost three Airtel Africa shares at one point.
Long-term outlook
But as a long-term investor, the exchange rate risk is something I have already considered and can live with. Sadly, I think it is part of doing business in the sorts of markets where Airtel Africa operates.
The positive side of the coin is that such markets have millions of young customers and large growth potential. Airtel Africa has a strong, established business and local operations.
Over time I expect the firm can resolve the question of how to reduce the impact of volatile exchange rates, whether through currency swaps or price increases.
Given the company’s business potential and valuation, I plan to continue holding its shares despite the current weak performance.
