Colin Smith and Farouk Miah - Empty Rooms: Investing in Africa (Capital Allocators, EP. 279)

Mobile Money

The African telecom sector is witnessing a significant transformation with the rise of mobile money, a service that is rapidly replacing traditional banking. Farouk Miah highlights MTN Nigeria's journey, noting that while voice and data services are still growing, mobile money is emerging as a crucial revenue stream, expected to grow by over 30% 1. This growth is driven by Nigeria's large population and the structural tailwinds of increasing wealth and technology adoption.

Africa, in many ways, is the holy grail for telecom investors. Why? Because you still have voice growing 8%, 9%, 10%. So voice is still high, single digit growth. You have data growing at 20% and then you have this unique component which is mobile money, essentially a replacement for banks growing at 30% plus.

--- Farouk Miah

Colin Smith adds that investing in companies like MTN Nigeria offers substantial returns, with opportunities to buy at single-digit price-to-earnings ratios, making it an attractive investment 1.

   

Investment Potential

Investment opportunities in Africa's telecom sector are vast, with market leaders benefiting from economies of scale and strong financial metrics. Farouk Miah explains that the largest companies often have the strongest balance sheets and higher margins, making them attractive to investors 2. Despite trading at a discount compared to global peers, these companies offer high returns on equity and dividend yields.

The discount has widened since COVID which is interesting. But to us, the most important aspect of the margin of safety is that these companies trade at a discount to their own last ten year valuations.

--- Colin Smith

Colin Smith emphasizes the importance of managing country-specific risks, noting their strategy of limiting exposure to any single country to 30% of the portfolio 3.