The BT (LSE: BT.A) share price recently surprised me, hitting new highs in September when I was sure it would dip.
The move up to 148p on 18 September last week was its highest price since June last year. The growth follows a period of extreme volatility after the shares jumped 28% in May. A jump I felt sure would lead to a correction — yet here we are.
Turns out BT’s controversial transition to digital may be going better than expected. But I’m still a bit wary about the stock. Its £14.5bn market-cap’s overshadowed by £18.5bn debt and it only has around £2.3bn in spare cash.
That could put serious limitations on future operations and threaten dividend payments. So instead of BT, I’ve got my eye on another telecom share with more promising growth potential.
Airtel Africa
On the face of things, Airtel Africa (LSE: AAF) may not appear a good option. Much of its revenue stems from it’s Mobile Money operations in Nigeria and East Africa. Economically, these are powerful but unstable regions, both mired by political upheaval this year.
The plummeting value of Nigeria’s naira shattered the company’s profits earlier this year.
Now with a price-to-earnings (P/E) ratio in the high 500s, it hardly seems good value. At 2.7 times, it’s price-to-book (P/B) value’s slightly better, but still not great.
However, I think the stock could be a surprising winner. It was tipped as a Buy by Goldman Sachs last month and is already up 5.6% since. It’s trading at 89% below fair value based on future cash flow estimates.
But what really caught my attention is the growth prospects. Earnings per share (EPS) are estimated to grow at a rate of 40% a year going forward — more than double the industry average! With that kind of growth and a trusted management team, it’s future return on equity (ROE) is calculated to be 48%.
A risky option?
The above is a fairly impressive forecast, considering the company was unprofitable only a few months back. If earnings improve as forecast, Airtel could turn out to be a more profitable investment than BT. If they don’t, it could end up a financial black hole.
At 3.8%, its dividend yield‘s lower than BT and at risk of being cut if EPS doesn’t improve as predicted. Yet despite the fall in earnings, dividend payments have increased for the past three years. Until now, it’s had sufficient cash flows to cover payments, and still does. So with earnings already improving, I don’t expect a reduction.
I like its chances
With a £14.6bn market-cap and £20bn in revenue last year, BT’s likely the more reliable choice. But I’m not sure how much more space it has to grow.
Airtel’s only just coming out of a slump and it’s outlook is still a bit shaky – but I like its direction. I spent almost half my life living in Africa, so I know firsthand the continent’s incredible potential. As such, I plan to allocate a small amount of capital to the shares this week and see where they go.
