Helios Towers facing rising costs

Helios Towers' (HTWS) strategy to own telecoms towers across Africa is becoming more expensive by the day. Higher borrowing costs means financing the acquisition of new towers becomes a more expensive proposition. Meanwhile, rising energy prices will make building and maintaining them more costly activities.

In 2021, the plan of 'growing at scale' progressed along nicely. The number of sites increased 30 per cent to 9,560 and tenancies jumped 20 per cent to 18,776. Around 40 per cent of the tenant growth was organic while the rest came through acquisitions.

Growth has been speedy but it hasn’t come cheap. Net debt to adjusted cash profit rose from 2.9 times up to 3.6 times. Meanwhile, finance costs jumped 28 per cent to $151mn (£115mn).  

Overall tenancy ratio fell 8 per cent to 1.96 tenants per tower. This was because the new acquisitions tend to have lower ratios than current sites, so is a temporary effect. Due to the drop in ratio the group is now targeting an adjusted Ebitda margin of 51-53 per cent in 2022, down from 54 per cent last year.

The lease rate per tenant is expected to increase in the range of 3-5 per cent because the contracts are linked to inflation. This should partially offset the rising energy costs. However, if Brent Crude continues to rise off the back of the Ukraine conflict then it could outstrip the overall inflation rate significantly – which would mean a hit to Helios’s margins.

Brokers expect earnings to lift off in the coming years, with a 2025 EPS forecast of 11.84p a share. This implies an undemanding 2025 PE ratio of 10.5.

The premise that growing telecoms demand in Africa will drive top-line growth is convincing. Maintaining margins in a rising interest rate and energy price environment will be tricky, though. Hold.

Last IC View: Hold, 156p, 19 August 2021