UK shares in focus: could this be the cheapest growth stock on the FTSE?
UK shares form the core of my portfolio. But there isn’t a host of traditional growth stocks among them. Instead, if I’m looking for growth, it may be wiser to look towards the US and the tech-heavy NASDAQ.
But there are some UK-listed firms that are focused on growth. One of those is Airtel Africa (LSE:AAF). So, is this growth-focused stock right for my portfolio?
Growth stocks traditionally have a higher risk profile than value stocks. As we all know, there’s no guarantee that a company will deliver its promised growth. As such, I have less exposure to growth stocks than I do to value stocks.
When it comes to valuations, growth stocks tend to appear to be more expensive. That’s because they’re valued on future cash flows. Investors, therefore, pay a premium for this exposure to growth.
Typically, we might see growth stocks as those in tech, biotech, pharmaceutical, or green energy, but in reality, they can be in any sector. And because of this weighing towards future cash flow generation, they trade with higher multiples.
What makes Airtel different?
Airtel Africa is a multinational company — majority owned by the Indian telecommunications group Bharti Airtel — that provides telecommunications and mobile money services in 14 countries in Africa.
Telecoms can be seen as growth industry, especially when we look at the opportunities in the mobile money services sector. Airtel Africa is highly promising, primarily because of the geographies in which it operates.
The African continent — especially East and Central Africa where Airtel focuses its operations — is a high growth market, offering lucrative opportunities, with a higher risk profile, in many industries.
Communications and finance are two such sectors. For one, less than half of adults in Africa have a bank account. The industry is ripe for development, and is being encouraged by state-led initiatives to formalise markets.
Why I’m buying
Focusing on valuation, we can observe that Airtel Africa trades with a price-to-earnings ratio of 8.3. That’s nearly half the FTSE 100 average of 14. It’s worth remembering that the index is traditionally not geared to growth. As such, you’d expect a growth-oriented stock to trade with multiples above the index average. I’m not entirely sure whether it is the cheapest growth stock on the FTSE, but it can’t be far off.
Meanwhile a discounted cash flow model analysis suggests the stock should have a fair price of 500p. That’s four times the current price.
Naturally, I need to recognise that a discounted cash flow calculation is subject to assumptions on future cash flow. This can be challenging when we’re looking 10 years into the future, and especially with growth stocks.
In the last quarter, pre-tax profit fell 4% despite revenue rising. That could be seen as concern but profit attributable to the company actually rose 10.7% to $172m. Currently, the dividend yield is a manageable 3.5%.
So, despite the higher risk profile associated with investing in developing world business, I’m looking to add Airtel to my portfolio. I’m also expecting to see stronger growth when macroeconomic conditions improve and the US dollar weakens.
The post UK shares in focus: could this be the cheapest growth stock on the FTSE? appeared first on The Motley Fool UK.
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James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.