Helios Towers still waiting to turn acquisitions into profit

Helios Towers’ (HTWS) strategy is straightforward enough: the widespread purchase of telecommunications towers in Africa and the Middle East in a bid to tap into the growing demand for mobile phone coverage in these developing markets. Forecasts of massive growth in smartphone and mobile internet users in the region justify the plan, particularly given limited access to conventional banking services in many locales. However, it is currently coming at a hefty cost, with debt piling up in order to complete the necessary acquisitions.

At the end of the first half of the year, it had 8,603 sites, which represents a year-on-year increase of 1,511. This was driven by the acquisition of 1,207 sites from Free Senegal. The group's tenancies also increased by 2,184 year on year to 17,090. However, because of the dilutive effects of the Free Senegal deal, its tenancy ratio fell from 2.1 tenants per site to 1.99.

These acquisitions didn’t come cheap, though. In June, Helios raised $160m (£117m) through a $110m equity placing and a $50m bond issuance. Its net debt for the period rose 20 per cent to $786m, which left its net debt to cash profits ratio at 3.2 times, up from 3 times last year. The group's total interest costs were $60.1m, up from $47.4m.

All of this debt, the majority of which is currently due by 2026, shouldn’t be an issue if the group can move into the black and drive further cash flows. Its loss before tax for the recent period was $43.6m, an improvement on the $83m last year, but progress will need to accelerate given the debt overhang. Analyst consensus, according to FactSet, is that Helios will make a profit before tax of $8.8m for 2022 full-year before jumping to $50.3m at the end of 2023.

The analysts’ faith that the group can become profitable is likely grounded in the demographic trends that are playing into Helios’s hands. According to GSMA, a mobile network advocacy organisation, the number of unique mobile subscribers in Africa will rise 29 per cent from 477m in 2019 to 614m in 2025. The number of SIM connections is also expected to be up 29 per cent to 1.05bn.

The market seemed unimpressed with these results; shares in Helios lost 4 per cent of their value on results day, but beyond the debt concerns, it’s not immediately apparent where the bad news was. Site depreciation was up which damaged margins and organic tenancy additions were below Numis’s expectations. However, Helios’s tenancy guidance for its established markets for the full year remained at between 1,000 and 1,500.

Helios’s theoretical prospects are promising, but it’s always a concern when a company is carrying so much debt. Hold for now.

Last IC View: Hold, 157p, 11 March 2021