Company Reports

Narrow-moat Tele2 shares rose 6% after it reported first-quarter results as the firm beat company-compiled consensus estimates for EBITDA after leases and free cash flow. Sweden’s service revenue grew by 4% and EBITDAaL grew 2% organically as price increases in mobile and broadband kicked in while subscribers also grew. Even after price increases, Tele2's pricing plans remain significantly below those of Telia, so we expect Tele2 will continue to increase market share steadily while raising prices moderately. Tele2 has started 2024 on the right foot, with its revenue and EBITDAaL guidance looking within reach. We maintain our SEK 100 fair value estimate and shares remain fairly valued after a 12% rally since the beginning of 2024.

Narrow-moat Tele2 showed on Jan. 30 why it is one of our preferred names in the European telecommunications space. The firm closed a satisfactory year with 3.6% and 1.7% organic growth in service revenue and EBITDA after leases (EBITDAaL), respectively. Management also announced a SEK 600 million cost-cutting plan during the next three years, similar to the SEK 1 billion program it launched for the 2020 to 2023 period. This last plan has resulted in selling and administrative expenses being reduced cumulatively by 190 basis points, from 24.7% of sales in 2020 to 22.8% currently. In 2024, the firm expects 3% to 4% sales growth with 1% to 3% EBITDAaL growth as energy and wage inflation will keep weighing on costs. This is, however, still below management’s EBITDAaL growth target of midsingle digits, which we see as achievable given the firm’s focus on cost-cutting. Management also raised dividends for fiscal year 2023 to SEK 6.90 per share compared with SEK 6.80 in 2022. We are maintaining our SEK 100 fair value estimate and our Exemplary Capital Allocation Rating.

Narrow-moat Tele2's results were positive, overall, as they have removed investors' concerns that the company would not reach its 2023 guidance. Last quarter Tele2 shares took a 10% hit as there were concerns the company would not achieve its guidance of low-single-digit growth in EBITDA after leases, following a 0.4% decline in the first quarter and flat growth in the second quarter. EBITDAal has grown by a healthy 2.9% in the third quarter, leaving Tele2 in a good position for the full year. We maintain our SEK 100 fair value estimate with shares being slightly undervalued and trading around SEK 85.

Shares of narrow-moat Tele2 are down by more than 10% at the time of the writing after the firm reported second-quarter results. We believe investors have two main concerns: the first is that Tele2 will not reach its EBITDA after leases guidance for 2023 as EBITDAaL was flat year over year compared with management’s guidance of low-single-digit growth. The second is management increasing its capital expenditure guidance by around 20% for the next two years to strengthen the company’s 5G position, followed by a reduction in 2025 and 2026. Management now expects a capital expenditure/sales ratio of 10% to 14% (or SEK 2.8 billion to SEK 3.9 billion) compared with SEK 2.8 billion to SEK 3.3 billion previously. After these changes there is less room for error by Tele2, so we are maintaining our SEK 100 fair value estimate as medium-term EBITDAaL ambitions for low-single-digit growth look achievable to us and Tele2 management deserves the benefit of the doubt given they have historically been good with guidance and capital allocation.

End-user service revenue came in strong for Tele2 in the first quarter of 2023 at a 3.6% growth organically. This did not translate into EBITDA after leases, or EBITDAaL, growth, which declined by 0.4% year over year. Higher inflation and content costs in Sweden were the main drag (Sweden’s end-user service revenue was up 1% while adjusted EBITDAaL declined 4%), but we are not concerned as Tele2 still has to pass these higher costs to consumers in the later part of the year. Tele2 expects to increase prices around 30% to 40% more than what it normally does each year, to better absorb inflationary pressures. We don’t expect these increases will affect subscriber numbers, given Tele2's good reputation and the fact that Swedish consumers are used to price increases. The 0.4% decline in adjusted group EBITDAaL was below management’s guidance of low-single-digit EBITDAaL growth in 2023, but we expect Tele2 will catch up thanks to the price increases and its cost-oriented culture. We are maintaining our SEK 100 fair value estimate, with shares being fairly valued right now.

Tele2 aims to maintain its position as Sweden’s second-largest player in both the mobile and broadband markets. Although Sweden’s consumer market is relatively stable, we expect Telia, and not Tele2, to be the main target of any pressures coming from Telenor or HiG3. Telia is by far Sweden’s most expensive telecom provider, with prices 15% to 30% higher than peers in both mobile and broadband. Tele2 executes moderate price increases every year which customers seem to accept, but the pricing gap with Telia is still large. We therefore expect Tele2 will maintain or slightly grow its subscriber numbers, while it tries to close the price gap with Telia.

We relaunch coverage of Tele2 and Telia, maintaining our narrow moat and stable moat trend ratings for both. Our new fair value estimates are SEK 100 and SEK 29 respectively, compared with SEK 115 and SEK 35 previously, after revisiting our medium- and long-term forecasts.

Tele2 aims to maintain its position as Sweden’s second-largest player in both the mobile and broadband markets. Although Sweden’s consumer market is relatively stable, we expect Telia, and not Tele2, to be the main target of any pressures coming from Telenor or HiG3. Telia is by far Sweden’s most expensive telecom provider, with prices 15% to 30% higher than peers in both mobile and broadband. Tele2 executes moderate price increases every year which customers seem to accept, but the pricing gap with Telia is still large. We therefore expect Tele2 will maintain or slightly grow its subscriber numbers, while it tries to close the price gap with Telia.

We are pleased with Tele2's fourth-quarter results, which showed healthy 3% organic growth in service revenue and EBITDA (after leases) thanks to the stability of the Swedish market and very strong performance in the Baltics. The ordinary dividend for fiscal 2022 was raised to SEK 6.80 per share compared with SEK 6.75 last year. Tele2 remains one of our favorite stocks in the European telecommunication sector thanks to its cost controls, right capital allocation decisions, and exposure to healthy markets. We maintain our SEK 115 fair value estimate.

Narrow-moat Tele2's third quarter seemed like a repetition of the second quarter, with low- to mid-single-digit growth in sales and EBITDA after leases, and the company being well positioned to reach its full-year objectives. Overall, service revenue grew 3.5% organically, compared with 3% last quarter. Although the company’s cost-saving programme helped to partially offset inflationary pressures, energy costs wiped out 3% growth in EBITDAaL (its EBITDAaL grew by 1.5% and would have grown 4.5% without changes in energy prices). Tele2 remains one of our preferred picks among European telecom companies given the stability of its end markets and an adequate dividend policy, with growing ordinary dividends coupled with extraordinary ones when there are earnings surprises or asset sales. The company is also doing a good job of keeping costs under control. We maintain our SEK 115 fair value estimate.

After divesting its Kazakh and Dutch operations, Tele2 is focusing on its main market, Sweden, where we think it has successfully strengthened its strategic position. First, its acquisition of TDC Sweden, a leading B2B services provider for both public sector and Swedish blue-chip firms, at the end of 2016 significantly improved its enterprise business. Second, with the acquisition of Com Hem, the largest cable TV operator in Sweden, Tele2 has embraced the fixed-mobile convergence. The firm can now bundle consumer services into dual-, triple-, or quadruple-play offerings (fixed and mobile telephony, broadband, and TV). With these new offerings, Tele2 can effectively compete with its main rival, Telia, in a multi-play telecom environment where pure mobile players might struggle. The strategic move to own a fixed network pleases us since the fixed services are inherently stickier products.

We are pleased with narrow-moat Tele2's performance in 2022 so far. Sales and EBITDA continued to grow at healthy rates during the second quarter (3% each), thanks to stability in Sweden and the strong growth we are used to in the Baltics (12%, in line with previous quarters). Revenue growth did not result in EBITDA margin expansion, though. The cost-saving plan, which intends to save a cumulative SEK 1 billion by the first half of 2023, was offset by higher inflationary pressures, so EBITDA remained flat at 40.9%. Management stuck to its 2022 guidance for low-single-digit sales growth and mid-single-digit EBITDA growth, which we see as achievable at this pace (3% and 5% growth in sales and EBITDA, respectively, year to date). We are maintaining our SEK 115 fair value estimate

There were no surprises in narrow-moat Tele2's first-quarter results, with sales continuing to grow at low single digits (3% this quarter) and EBITDA growing faster (6%) thanks to continued cost controls. One of the main tailwinds was the 3% year-over-year growth in the Swedish business segment thanks to easy comparable figures and a softening of pressures in the mobile market. The Swedish consumer market showed the usual healthiness where stability in mobile and fixed was offset by the traditional TV segment, which was once again the main detractor due to customer losses. We are maintaining our SEK 115 fair value estimate.

Tele2's fourth-quarter results were in line with company-provided consensus, with service revenue coming in at SEK 4.9 billion, a 2% organic increase and underlying EBITDA (after leases) growing 1% organically during the quarter. Sweden continues to show stability seen in previous quarters, with consumer mobile and broadband revenue being supported by steady price increases and stable customer bases. Management is executing a strategy of balancing “value with volume,” which seems to be paying off. The Baltics' revenue continued to climb at double-digit rates, while EBITDA grew by high single digits since October 2021. Management also released its 2022 and medium-term guidance, where they expect low-single-digit revenue growth and mid-single-digit EBITDA growth. We maintain our SEK 115 fair value estimate.

After divesting its Kazakh and Dutch operations, Tele2 is focusing on its main market, Sweden, where we think it has successfully strengthened its strategic position. First, its acquisition of TDC Sweden, a leading B2B services provider for both public sector and Swedish blue-chip firms, at the end of 2016 significantly improved its enterprise business. Second, with the acquisition of Com Hem, the largest cable TV operator in Sweden, Tele2 has embraced the fixed-mobile convergence. The firm can now bundle consumer services into dual-, triple-, or quadruple-play offerings (fixed and mobile telephony, broadband, and TV). With these new offerings, Tele2 can effectively compete with its main rival, Telia, in a multi-play telecom environment where pure mobile players might struggle. The strategic move to own a fixed network pleases us since the fixed services are inherently stickier products.

Narrow-moat Tele2 continued the positive trend in previous quarters with revenue growing 2% organically (1% last quarter) to SEK 6.63 billion thanks to a strong mobile segment in Sweden and good performance in the Baltics, which grew 12% year over year. Despite results having been good overall, shares are down more than 4% at the time of the writing and we believe this might come from management leaving its guidance unchanged despite the good results. Service revenue growth and EBITDA growth guidance seem easily achievable to us, especially considering management’s expectations of a strong fourth quarter. Service revenue and EBITDA for 2021 should be in the higher range of guidance (which is low-single-digit service revenue growth and mid-single-digit EBITDA growth). We maintain our fair value estimate.

After divesting its Kazakh and Dutch operations, Tele2 is focusing on its main market, Sweden, where we think it has successfully strengthened its strategic position. First, its acquisition of TDC Sweden, a leading B2B services provider for both public sector and Swedish blue-chip firms, at the end of 2016 significantly improved its enterprise business. Second, with the acquisition of Com Hem, the largest cable TV operator in Sweden, Tele2 has embraced the fixed-mobile convergence. The firm can now bundle consumer services into dual-, triple-, or quadruple-play offerings (fixed and mobile telephony, broadband, and TV). With these new offerings, Tele2 can effectively compete with its main rival, Telia, in a multi-play telecom environment where pure mobile players might struggle. The strategic move to own a fixed network pleases us since the fixed services are inherently stickier products.

No-moat Deutsche Telekom (75%) and narrow-moat Tele2 (25%), who jointly own T-Mobile Netherlands, or T-Mobile NL, have agreed to sell the entity to private equity firm Apax Partners for EUR 5.10 billion. Although the transaction price is higher than what we would have anticipated, it does not have a material impact on our valuations. Our forecasts were already considering the value of T-Mobile NL and the business as small relative to the size of Deutsche Telekom and Tele2; hence we are maintaining our fair value estimates for the latter two companies.

Narrow-moat Tele2 continues to post good performance, slightly upgrading revenue and EBITDA (after leases) 2021 guidance. Compared with the previous expectations on revenue and EBITDA for flat and 2%-4% growth, respectively, the company now expects “flat to low-single-digit” and “mid-single-digit” increases in 2021, in line with our forecasts. We previously highlighted Tele2’s beneficial focus on cost controls and revenue stabilization increases our upbeat view. Overall, service revenue grew 2% organically to SEK 4.82 billion compared with a 1% decline in first-quarter 2021. Shares are up 5% at the time of the writing and look moderately expensive versus our SEK 115 fair value estimate.

After divesting its Kazakh and Dutch operations, Tele2 is focusing on its main market, Sweden, where we think it has successfully strengthened its strategic position. First, its acquisition of TDC Sweden, a leading B2B services provider for both public sector and Swedish blue-chip firms, at the end of 2016 significantly improved its enterprise business. Second, with the acquisition of Com Hem, the largest cable TV operator in Sweden, Tele2 has embraced the fixed-mobile convergence. The firm can now bundle consumer services into dual-, triple-, or quadruple-play offerings (fixed and mobile telephony, broadband, and TV). With these new offerings, Tele2 can effectively compete with its main rival, Telia, in a multi-play telecom environment where pure mobile players might struggle. The strategic move to own a fixed network pleases us since the fixed services are inherently stickier products. On a less positive note, the Com Hem acquisition was rather expensive and has increased Tele2’s debt level. However, we expect the firm’s steady free cash flow to be enough to repay the additional debt, increase its dividend, and further invest in its operations.