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Morningstar | Telenor Delivers More of the Same in Second-Quarter Results; Top-Line Weakness but Solid Margins

Telenor reported another mixed quarter, with revenue declining but margins holding firm. We are maintaining our fair value estimates of NOK 164 per local share and $20 per ADR as well as our narrow moat rating. We believe the shares are fairly valued. Reported revenue fell 3% year over year on a proforma basis versus our full-year projection of a 6.4% decline. However, our full-year projection uses actual 2017 results as the base and includes operations in Central and Eastern Europe for six months. The sale of the Central and Eastern European business is expected to close this quarter. Adjusting for these accounting discrepancies, the firm’s revenue came in slightly lower than we expected. From a cost perspective, Telenor continues to benefit from efficiency initiatives, reducing operating expenses by 4% year over year after adjusting for one-time items from the previous comp. These initiatives are centered around the digitalization of their sales and marketing operations as well as their customer interaction apparatus. The cost controls led to an adjusted EBITDA margin of 41.1% for the quarter, ahead of our full-year 40.4% estimate.

The company enjoyed net subscriber gains of approximately 2 million during the quarter. This was driven by increases of 1.7 million and 600,000 in Bangladesh and Pakistan, respectively, offset by decreases in Thailand and the Nordic countries. We continue to see countervailing forces at play, with subscriber growth in some markets being offset by lower average revenue per user or ARPU (Myanmar for example) and the converse occurring in other markets (Malaysia). Importantly, data usage is increasing, and as we’ve previously discussed, this is helping to maintain revenue growth even as subscriber growth slows. Additionally, in the Nordic countries Telenor is having success with its converged wireless and fixed-line offerings, particularly where it has built out a fiber-based network.

The firm grew reported revenue by 5.5% year over year in Malaysia and saw adjusted EBITDA margin expansion of 90 basis points to 47.1%. Telenor was also able to replicate this margin expansion in some of its more mature markets. As an illustration, even with weak top-line performance in Denmark, it was able to widen its adjusted EBITDA margin by an impressive 4.5% to 22.6%. In Norway, the adjusted EBITDA margin declined year over year but remained strong at 42.3% for the quarter and 43% for the first half of 2018. In Thailand, the company opted not to participate in an 1800 MHz spectrum auction, viewing the terms as value destructive. Management is reticent regarding whether it will participate in future auctions to further enhance their networks. In either case, however, we expect spending to pick up in the second half of the year and beyond, hindering the pace of margin expansion.