IHS is a game about emerging market cellphones. Why the stock looks like a buy.

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IHS’ organic revenue growth has been 18% per year for the past five years.

The time of dreams

IHS Holding

is the newcomer to the world of cell towers – and its stock may be worth buying.

Operating a wireless network requires a multitude of antennas, cell towers, and cables that connect them all. While the likes of

AT&T

(T) and

Verizon Communications

(VZ) compete with customers,

American Tower

(AMT) and

Crown Castle

(CCI) own and maintain tens of thousands of cell towers and miles of fiber optic cable. They rent space from mobile operators, just like any landlord.

And they make a mint doing it. Profit margins are wide, recurring revenue is high and future visibility is clear, given long-term contracts with annual indexations. In developed markets, recent growth has come from upgrading wireless networks to support 5G, which requires larger, heavier equipment that generates more rent, and more antennas to handle the range. wider bands of wireless spectrum required by 5G.

IHS (IHS) went public last fall. It’s a minnow in the industry, with a market cap of $2.1 billion, compared to American Tower’s $122 billion. IHS differs most in its focus on emerging markets, where the wireless business is in an early stage of growth and the cell tower rental model is relatively new. It has some 31,000 towers in 11 markets in Africa, Latin America and the Middle East, with most of its revenue coming from Nigeria.

There are favorable macroeconomic factors: population growth is rapid, smartphone penetration is increasing and many countries are only just beginning to think about 5G. IHS’ organic revenue growth has been 18% per year for the past five years, while adjusted earnings before interest, taxes, depreciation and amortization – Ebitda, for short – has grown 15% per year. . Its 51% margin is incredibly high, its free cash flow is strong, and its leverage is manageable at current levels.

Everything is not perfect. About half of IHS’s revenue is contractually pegged to the US dollar or Euro – mostly reset quarterly – with the remainder denominated in local currencies, such as the Nigerian naira, Brazilian real and southern rand -African. These have consistently lost value against the greenback this year. And due to unreliable power grids in many IHS markets, the company relies on diesel generators as primary or backup power for a quarter of its cell towers. As oil prices soared, so did IHS’s costs. It invests in solar power and batteries to reduce the impact.

The biggest problem could be the title’s particularly low float. Insiders own 95% of the shares, with 20% tranches becoming available every six months, the next in October. This will help increase the universe of potential investors and eventually allow the company to use its free cash flow to buy back shares.

IHS stock fell 63% to $6.27 from its October IPO price of $17 on the back of the issues. It now trades around 12 times forecast earnings for 2023, well below its larger peers American Tower and Crown Castle, which are more than 45 times next year’s earnings despite their slower growth.

This discount more than offsets the emerging market risk, while the stock’s decline represents a buying opportunity for long-term investors. Wall Street’s average target price is above $18, up 185% from Friday’s close. You make the call.

Write to Nicholas Jasinski at [email protected]

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