Helios Towers (OTCPK:HTWSF) is a telecommunications tower company focused on Africa and the Middle East. Towerco’s business model is fairly simple.Buy a portfolio of towers, run them efficiently and add more tenants to your towers Tower, which improves the return on invested capital.
While the stock has slipped along with other towercos, Helios’ business performance is moving in the right direction. Although the company took on more debt, it was used to build a stronger platform in the Middle East.
Potential catalysts for higher share prices over different time frames are deleveraging and continued growth, initiation of shareholder returns, and potential takeover targets.
Solid Growth Record
Helios Towers was founded in 2009 through multiple acquisitions Portfolio of towers from different Mobile Network Operators (MNOs) in Africa. Helios has been listed on the London Stock Exchange since 2019. At the time of the IPO, Helios had 6,880 towers and 14,100 tenants. Today, the company has 13,870 towers and 25,880 tenants in nine countries. By 2026, the company aims to have 22,000 towers.
For towercos, Africa offers several advantages. In the long run, growing population, rising smartphone penetration, and network upgrades to new generations should drive investment in mobile networks. Most of the towers in Africa and the Middle East are still owned by mobile operators, presenting opportunities for Helios to grow inorganically.
Helios has a track record of solid revenue and EBITDA growth. As the business model relies on inorganic growth from asset acquisitions, debt and interest expenses increase with growth. The company completed its latest acquisition in Oman in late 2022, spending about $500 million on 2,500 towers at an EV/EBITDA multiple of 12.4.
Coupled with the acquisition of existing assets and good fundamental development, the end of the second quarter showed excellent year-over-year growth. Subsequently, the business moved in the right direction with the biggest improvement in profits.
Potential Catalysts Driving Shares Higher
Deleveraging and continued growth
Due to asset acquisitions in Oman, Helios’ immediate growth potential is limited by its debt profile and the current interest rate environment. Currently, Helios’ debt is slightly above its target range of 3.5-4.5 times. As of the end of the first half of 2023, its leverage ratio was 4.8 times, down 0.3 times quarter-on-quarter.
Therefore, the company will likely focus on deleveraging and improving the financial profile of newly acquired assets in the next 2-4 quarters. Last year, Helios spent $765 million in capital expenditures, and this year the company expects to spend $180-210 million. With full-year adjusted EBITDA of $355 million, Helios is up from $283 million in 2022, so there’s room to pay down debt. At the end of the second half, the company had net debt of $1.7 billion (including capital leases). 83% of Helios’ debt is fixed-rate, with an average remaining maturity of four years.
At the time of purchase, the acquired Oman portfolio had a low lease ratio (i.e. the number of tenants per tower) of 1.2. Now, the company needs to sell leases to the country’s other two mobile network operators, Ooredoo Oman and Vodafone Oman. Encouragingly, Oman’s leasing rate has risen by 0.1 in the first half of the year.
Helios is also developing newly acquired portfolios in Senegal, Madagascar and Malawi, which collectively have 2,718 towers. Improving lease ratios for these towers provides Helios with an opportunity to grow organically and improve ROI.
Tips on Shareholder Returns
Currently, Helios does not pay a dividend and does not repurchase stock. However, in the latest Q2 2023 earnings call, management is looking at potential shareholder returns in the short or medium term.
So as long as we continue to deleverage to the extent that we expect, preferably in the middle, then we will actually start to think about some kind of shareholder payout, if not a little bit sooner. -Manjit Dhillon, Chief Financial Officer
With America’s Tower Corp a favorite with income investors, the dividend is sure to draw more attention to the stock. Meaningful share repurchases may be difficult due to limited free float and low trading volume.
Of course, being a dividend payer is what we want to achieve. Based on this trend, we achieved this goal very quickly in the short to medium term. -Tom Greenwood, Chief Executive Officer
Management’s remarks are rather puzzling. The company has an ambitious growth vision and a high debt load, so making a distribution to shareholders seems like an odd plan.Management is certainly confident in reducing debt and allocating capital at the same time, but
We’ll be able to — in our view, we’ll be able to pay a potential dividend but also look at the actual distribution of capital to shareholders. In short, we should be able to have both. But it all depends on the decision point at the time. It also depends on what opportunities the company has in terms of organic and M&A growth. -Manjit Dhillon, Chief Financial Officer
potential acquisition target
Helios’ largest owners are primarily private equity or asset management firms focused on emerging markets. Four of the five largest owners have been involved with the company since its inception or listing. This may be one of the reasons for the pressing demand for shareholder distributions. The five largest shareholders are:
Newlight Partners owns nearly 15% of Helios Towers.
Helios Investment Partners owns 7.5%
IFC Asset Management, a member of the World Bank Group, owns 7.4% (8.4%) of the shares.
J. Rothschild Capital Management Limited, the listed investment vehicle of the Rotschild family, holds a 5 percent stake.
Stream Capital 4.5%
All owners are patient investors. Sooner or later, however, they want to see a return on investment in the form of value appreciation or shareholder returns. There are a lot of funds and dry powder available on the private equity side. A market cap of less than $1.2 billion is a small target for the largest private equity firms such as Brookfield, which have been acquiring much larger tower portfolios valued at more than 20 times EV/EBITDA.
In the Western Hemisphere, mobile network operators have been reducing capital expenditures. This trend works against towercos, who need to lease space on towers to install new communications equipment. In the markets where Helios operates, MNO business is growing as populations grow, data usage increases and MNOs upgrade their networks from 2G and 3G, which still account for 70-80% of the market, to more advanced technologies.
Rising interest rates, currency depreciation in different markets, and pressure on P/E ratios are the main risks for the investment thesis. There are some mitigations. 64% of the company’s revenue is denominated in dollars or euros. Helios typically fails to transmit inflationary pressures to customers with a lag. This reduces relative profitability as costs are simply invoiced.
Upside potential exists if market continues to value EBITDA
Helios Towers isn’t the cheapest tower company focused on emerging markets. I’ve covered IHS Towers several times, and it remains one of the most interesting opportunities in the industry. However, Helios has less exposure to individual countries (Tanzania has 30% of towers), its market is less exposed to currency depreciation, and it operates more efficiently.
The thesis on valuation is fairly straightforward. The company continues to grow EBITDA through price increases, adding new tenants to existing towers, building new towers, and occasionally making portfolio acquisitions. Historically, Helios has grown EBITDA by more than 10% per year. Since Helios Towers went public, the average EV/EBITDA multiple is 9.5x.
If we conservatively assume EBITDA grows 5% per year, the company only reduces debt by $50 million per year (excluding capital leases), and the EV/EBITDA multiple returns to historical averages, then the stock could have a price tag of almost £1.58. Almost doubled. If the multiple holds at current levels, the share price would reach £1.14, still well above the current price of £0.87 at the time of writing. Eight analysts give Helios an average price target of £2.35.
Helios Towers is another tower company capitalizing on the growth of digital infrastructure in emerging markets, with built-in mitigation against currency debasement and inflation. The company has a proven track record of growth and further potential, and has given hints of entering the next phase of shareholder value creation. Historically, and based on the companies’ current prospects, the relative valuations of these stocks appear attractive.
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