Ethio Telcom’s IPO has drawn much of the publicity in the mainstream media. Our focus here is on the valuation at the IPO which is set at  ETB 300Bn (USD2.5Bn). Ethio Telecom’s valuation multiples indicate a higher premium compared to its counterparts, despite the macroeconomic uncertainty and political challenges in Ethiopia. Considering the current landscape, this premium appears to be on the higher end. We could argue that Ethio Telecom’s multiples should be below those of its peers, especially given its exposure to foreign currency-denominated debt and the significant devaluation of the Ethiopian birr.

Let’s explore some key driver to better understand the valuation:

Ι. Customer dynamics

The telecom and mobile money industry relies heavily on customer growth and retention, which are essential drivers of revenue. Within this segment, there are some KPIs worth noting.

• • • Average revenue per user (ARPU)
    • Subscribers growth
    • Churn rate

Source: Ethio Telecom Prospectus

In terms of subscribers and ARPU, the company has shown significant growth. However, there is a lack of data regarding the churn rate, which makes it difficult to fully assess the sustainability of this growth.

ΙΙ. Market Dynamics and Performance

In Ethiopia, the telecom and mobile money markets are predominantly controlled by Ethio Telecom, which generates 95% of its revenue from telecom services and holds a 95% market share. Safaricom, on the other hand, maintains a 5% market share. This strong position has allowed Ethio Telecom to achieve an attractive EBITDA margin, comparableto other companies operating in similar markets. 

Source: Compiled from Capital IQ and Ethio Telecom Prospectus

III. Comparable transactions

Assessing comparable transactions provides a view on how similar companies are traded in other markets.

Source: Compiled from Capital IQ and Ethio Telecom Prospectus

IV. Uncertainty over Liabilities

The active financing agreements outlined in the prospectus show that the outstanding debt as of June 30, 2024, was USD 302.3 million, financed by three different lenders. Notably, all repayments are denominated in USD. Given the recent shift in currency policy, this outstanding debt effectively doubles in birr terms, considering the current exchange rate of 115 (equivalent to ETB 17.7 billion on June 30, 2024, and ETB 34.8 billion on October 22, 2024). This burden is expected to grow as the birr loses value in the coming months.

The treatment of net debt in the valuation remains unclear, but it should ideally be deducted from the valuation, which raises further concerns about the current valuation. This lack of clarity strengthens the argument that the company may be overvalued, especially in light of its escalating foreign currency liabilities.

In conclusion, while Ethio Telecom’s IPO valuation may seem optimistic, a more reasonable range might lie between 3.0x and 4.0x, given the company’s fundamentals and the challenging macroeconomic environment. The ongoing uncertainties around currency depreciation and debt repayment create additional risks that potential investors must consider. What do you think—does Ethio Telecom’s market dominance justify this premium, or is the valuation setting investors up for disappointment?

[1] Revenue converted to USD with an estimated average exchange rate of 90 considering the revenue covers the full 2024 revenue.

[2] Listed on the Nairobi Stock Exchange

[3] LTM as of 31 – Mar – 2024

[4] Listed on the London Stock Exchange (LSE)

[5] LTM as of 30 – Jun – 2024