Morningstar | Tele2 Reports Strong 3Q Revenue and Margin Growth; Raising Our FVE to SEK 91; Shares Overvalued
Tele2 reported another solid quarter, and we expect to increase our fair value estimate to SEK 91 per share from SEK 83, but we believe the shares remain overvalued. Our no-moat rating remains unchanged. Sweden, the firm’s largest market, returned to small revenue growth, which is a good sign. The firm’s key growth drivers remain Kazakhstan and the Baltics. Service revenue grew 22% in Kazakhstan in local currency terms, but most of this was from higher average revenue per user, driven by inflation, which was lost in translating to Swedish krona. Likewise, Croatia increased service revenue 12% and Lithuania 10% in local currency terms, but less in krona terms. The firm is benefiting from increased data usage and the movement to smartphones. We expect this trend will continue, but the growth rate will likely decline in the future.Tele2 has received regulatory approval to acquire Com Hem, the largest cable TV operator in Sweden, which is expected to close in early November. Com Hem’s results were a bit disappointing, with revenue basically flat versus the year-ago period. However, we anticipate Com Hem will be able to grow its revenue next year. Importantly, the combined company will now be able to sell converged fixed-line and wireless services in Sweden, which has begun to see a significant move toward convergence.
Tele2 reported an EBITDA margin of 30.3%, which is significantly higher than our full-year estimate of 23.2%. However, we continue to include the firm’s Dutch operations, which have an EBITDA margin below 10%, as we remain skeptical that the European Union regulators will approve Tele2 selling its Dutch operation to Deutsche Telekom. Despite that, the margin expansion in Kazakhstan has been faster than we anticipated, and we have sped up our expectations for margin growth.
Tele2 is engaged as a telecom operator. Co. provides mobile communication services, fixed broadband and telephony, data network services and content services. The mobile service comprises various types of subscriptions for residential and business customers as well as prepaid cards. Fixed broadband includes direct access, which is its own services based on access via copper cable and other forms of access, such as fibre networks, wireless broadband and metropolitan area networks. Fixed telephony includes resold products within fixed telephony. The product portfolio within resold fixed telephony consists of prefix telephony, pre-selection (dial the number without a prefix) and subscriptions.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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