Helios Towers' debt will drag

Helios Towers (HTWS) is an expensive business to run, and there is the question of whether the costs of financing its high debt pile and maintaining the infrastructure will grow faster than revenue. Its business is based around telecoms companies paying for spots on Helios’ towers that are scattered across Africa. In simple terms, the more spots it sells on the towers, the more money it makes.

In the first half of the year, Helios increased its number of sites by 24 per cent to 10,694. Its number of tenancies rose 20 per cent, with the tenancy ratio fell slightly to 1.92 tenants per tower from 1.99.

The decreased tenancy ratio is because the new assets acquired in Madagascar and Malawi had lower ratios than the rest of the portfolio. Helios will be hoping to bring these in-line with the rest of the business. This fast expansion is lowering profitability, with the adjusted cash profit margin dropping 3 percentage points, though once expansion is complete it can be expected that margins will head back up.

The issue for Helios is that it has taken on a lot of debt to fund all its tower acquisitions. Net debt increased 38 per cent to £1.08bn. The net debt to cash profit ratio is a high 3.9 times, while finance costs rose 62 per cent to $104.7mn (£86.93mn). Once the finance costs and the £76mn of depreciation costs are factored in, the company's earnings swing from a $136mn adjusted cash profit to a $122mn loss before tax.

Helios should be confident in its ability to pay the debt because it has $4.2bn of contracted revenues with blue-chip telecoms companies with an average remaining term of 7.2 years. Most of these contracts are also pegged to CPI, so as inflationary costs go up so should revenues.

The concern is how much of a drag maintenance and finance costs are going to be on cash flows – especially after 2025 when most of the debt matures. Maintenance and upgrade capital expenditure was $20.2mn this half, which was well below the $76mn of depreciation. This might generate the need for catch up capex further down the line to add on top of rising finance costs if interest rates keep climbing.

Broker Numis estimates that Helios trades on a FY2022 EV/Ebitda ratio of 11 times, which is below its US peer group average of 25.9 times. Numis is also expecting revenue to grow by 50 per cent by 2024. However, we think that rising finance and maintenance costs will be a drag. Hold.

Last IC View: Hold, 124p, 17 Mar 2022