Unveiling Profitability: Ethio-Telecom's New IPO
The Ethio-Telecom IPO marked an important milestone in the country's economic progress,
bringing excitement into the Ethiopian financial world. This unparalleled market leader priced
its shares at ETB 300 each, with a total valuation of three hundred billion birr. Let us dive deep
into the important figures to see if this IPO is really a profitable opportunity for investors.
Spoiler alert: short-term gains might not be in the cards.
Key Metrics Paint a Mixed Picture
While Ethio-Telecom's strong 28% revenue growth in 2024 and its dizzying 45% EBITDA margin
are worth applauding, a closer look at the numbers raises some questions. Its new share’s price-
to-earnings (P/E) ratio of 15.78 is far higher than those of its industry peers Safaricom Kenya
(5.5) and Airtel Africa (4.2). High multiples can indicate overvaluation, which happens when
investors pay a premium for each unit of earnings.
At par value (100 birr per share), the 2024 earnings per share (EPS) is 19.01 birr per share,
which equates to an equivalent 19% return on investment. As appealing as this sounds initially,
when FY25 estimates are factored in, the ROI reduces to around 11%. For investors who prefer
short returns, Ethio-Telecom's proposal does not look as desirable as the average return on
investment (ROI) of other assets such as bank shares which offer 20%–35%.
7.3
5.5
4.2
Ethio Telecom Safaricom Airtel Africa
Kenya
EBITDA Multiple
Short-Term Gains: Not So Fast
Investors looking for short-term dividends or returns may want to look elsewhere. Earnings per
share are low relative to the high 300-birr stock price, even as Ethio-Telecom revenues and
profitability increase. Liquidity is also an issue, especially as it comes along with Ethiopia's
nascent secondary market. There will be fewer secondary market trades in the short to
medium-sized time frame, which will restrict the short-term exit alternative for investors.
Even though Ethio-telecom has a very conservative Debt-Equity ratio (5.9%) compared to the
industry standard as well as peers, The company's $330 million foreign-denominated debt,
which increased to 41.2 billion birr following the government's shift to the floating exchange
rate regime, is one of the key risks. This is likely to bring up a currency risk that will have some
impact on future profitability and valuation. [1]
Long-Term Outlook: A spark of Optimism?
The domination of Ethiopian Telecom in the market is a strong advantage. Moreover,
growing revenue and improving profitability year after year are indicators of the potential for
long-term capital appreciation. Investors can have a windfall in share price if the valuation of
the company increases above its current EBITDA multiple of 7.3. This is, however, subject to the
stabilization of the economic and regulatory environment in Ethiopia.
Comparing Investments: Ethio-Telecom vs. Alternatives
Compared to other investment options, Ethio-Telecom’s shares are priced at 3X their par
value but yield a lower ROI (11%) than fixed-rate bank deposits (12-17%) or banks’ shares (20-
35%). In addition, liquidity is "low," a stark difference from other available alternatives' "high"
liquidity.
Ethio-Telecom IPO- A long term play?
While the IPO of Ethio-Telecom is an exciting and ambitious move for Ethiopia, profitability can
be made complex for investors. The variables- low dividends, low liquidity compared to
alternatives, and overvaluation - point to a situation where short-term gains are highly unlikely.
However, Ethio-Telecom's dominant market position and growth prospects can generate
substantial rewards for risk-takers who stick to shares in the long run. Ultimately, your risk
appetite and investment time frame are the main factors for your decision to invest or
not.
Below a few key figures and a thermometer to turn up the heat on your insights
ROI
50% Investment ROI Liquidity
Bank Shares 20%-35% Medium
40%
30% Fixed-Rate Bank 13-19% High
Deposits
20%
Ethio-Telecom 11% Low
Ethio-
10% Telecom(11%)
Shares
Bank Deposits 7% High
0%
Prepared by: Beabsira Yenezer
Investment Analyst at Moveight Capital
