EUR 850.00 For Business Accounts Only

Morningstar | Tele2 Reports Mixed 2Q; Com Hem Acquisition Continues to Provide Cost-Cutting Synergies

Tele2 posted mixed second-quarter results as revenue came slightly below consensus and EBITDA slightly exceeded the Street’s expectation. Tele2 reported a 2% drop in revenue on a pro forma basis, as if the Com Hem acquisition occurred at the beginning of 2018. The firm also proposed an extraordinary dividend of SEK 6 per share to distribute the proceeds from the sale of the Croatian and Netherlands segments. We don’t anticipate any significant changes to our SEK 112 fair value estimate. We continue to believe the company has no economic moat and the shares are overvalued.

Revenue declined by 2% versus same period last year in Sweden, which generates roughly 80% of total revenue with the majority produced by the consumer business. The consumer side saw a 2% fall in revenue driven by continued losses in the DTV and legacy businesses. Postpaid subscribers increased by 3% but were offset by a 5% decline in prepaid subscribers, leading to a flat total mobile subscriber base. Despite the flat subscriber count, mobile revenue improved 1% as overall ARPU improved by 2% to SEK 168. We expect mobile competition to remain fierce in Sweden and believe that Telia will not easily cede market share to Tele2, particularly in the higher-value segments.

Fixed broadband in Sweden continues to expand with 13,000 net adds and flat ARPU which resulted in 5% revenue growth. DTT continues to shed customers, but the 10% loss was partially offset by a 1% increase in cable and fiber TV subscribers, leading to a 3% drop in overall TV customers. The subscriber loss and 2% fall in ARPU led to a 6% decline in digital TV revenue. Adjusting EBITDA margin on the consumer side improved to 38% from 36% as the firm continues to benefit from the significant cost-cutting opportunities from the Com Hem acquisition.

The ongoing weakness in Sweden was partially offset by continued revenue growth in the Baltic countries. Lithuania and Latvia both grew revenue by 4% year over year, offsetting the 4% drop in Estonia. While both Lithuania and Latvia grew their subscriber bases by 2%, much revenue growth driven by larger increases in ARPU including 9% growth in Latvia. We continue to worry that these ARPU increases may not be sustainable.