Investing.com -- Shares of Airtel Africa Plc (LON:AAF) fell on Wednesday after J.P. Morgan downgraded the company's rating to "Neutral" from "Overweight".
At 4:33 am (0833 GMT), Airtel Africa was trading 7.3% lower at £107.50.
The downgrade, driven by concerns over Airtel Africa's operational performance in Nigeria, included a reduction in the target price to GBp121 from GBp139, reflecting a 13% decrease.
A key factor in J.P. A key factor in J.P. Morgan's decision was Airtel Africa's deteriorating EBITDA margins.
“Airtel Africa’s Nigerian operations have seen EBITDA margins decline to below 50% on the back of higher diesel costs,” said analysts from J.P. Morgan.
The analysts attribute most of the decline to higher diesel costs, a major operating expense, which have squeezed margins more than expected.
Nigeria, a cornerstone market for Airtel Africa, has been a source of both revenue and increasing financial strain due to these rising costs.
Currency devaluation in Nigeria further compounds the company’s challenges. The weakening of the naira has not only increased the cost of doing business for companies like Airtel Africa, with substantial USD-linked expenses, but has also led to higher finance costs.
These financial pressures, exacerbated by a volatile currency, have resulted in lower-than-expected profitability, contributing to the downgrade.
In contrast, J.P. Morgan recently upgraded MTN Group to "overweight," raising its target price to R98, which underscores the widening gap between the performances of the two telecom giants in Nigeria.
MTN’s successful renegotiation of Master Lease Agreements (MLAs) with IHS has strengthened its margins, sharply highlighting the challenges Airtel Africa faces.
This comparison reflects broader trends in the SSA telecom sector, where the ability to effectively manage operational costs and mitigate currency risks is becoming increasingly crucial.
The downgrade also reflects broader sector volatility, with SSA telecom operators grappling with currency fluctuations and regulatory challenges that have dampened financial performance.
Airtel Africa’s specific difficulties in Nigeria flag the risks facing companies with significant exposure to the region’s economic instability.
J.P. Morgan’s revised forecasts, which are on average 24% lower than Bloomberg consensus estimates over the next three years, paint a sobering picture of the company’s near-term prospects.
Going forward, J.P. Morgan is cautious about Airtel Africa's ability to stabilize its margins and regain its footing in Nigeria.