EUR 850.00 For Business Accounts Only

Morningstar | Tele2 Reported Solid 2018 Results, but Provided Weak 2019 Revenue Guidance; Shares Overvalued

Tele2 reported 2018 results that were a bit ahead of our expectations, but management’s guidance was mixed with relatively weak revenue expectations partially offset by higher planned cost savings from its acquisition of Com Hem. We don’t expect any significant change to our SEK 91 per share fair value estimate and continue to believe the company has no moat and that the stock is overvalued.

Tele2 sold its Dutch operations on Jan. 2, 2019 and has exercised its right to sell its operation in Kazakhstan to its joint venture partner Kazakhtelecom. Tele2 accounted for both of these operations as discontinued, while we counted them throughout 2018. Thus, results aren’t directly comparable to our estimates. However, adjusting for the differences in methodology, Tele2 reported results that were a bit better on both the revenue and EBITDA sides than we expected. That said, management guided for flat revenue in 2019, while we expected revenue growth of about 3.4% after adjusting for discontinued operations. We expect the lower revenue growth in 2019 to offset the outperformance in 2018.

Under the firm’s new reporting structure, Sweden accounts for about 79% of its revenue. Tele2’s revenue grew 1.3% in the country, as consumer revenue increased 2.2%, while business revenue fell almost 1%. The growth in the consumer division was led by a 2.8% increase in postpaid average revenue per user, which offset a decline in wireless customers. Despite several acquisitions to gain scale in the business segment, it continues to be hurt by declining revenue in legacy products. We expect it will take some time before the business sector generates revenue growth. However, we expect more success in the retail side as Tele2 now has a strong converged offering with the acquisition of Com Hem.

Cost-cutting following the acquisition of Com Hem should help margins for the next three years, but we expect it will be difficult to expand margins beyond that with the loss of expected margin expansion as operations in Kazakhstan and the Netherlands gained scale. The loss of Kazakhstan also removes the fastest source of revenue growth, but this will likely lead Tele2 to increase its focus on the Baltics, which have shown good progress. Lithuania and Latvia have particularly performed well with ARPU growth of 9% and 5%, respectively. However, with subscriber growth slowing, we anticipate additional ARPU growth will become more difficult.