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Morningstar | Telenor Posts Mixed 2Q; Bangladesh Remains a Key Growth Driver

Telenor reported another mixed quarter, as the second quarter featured stronger organic revenue growth but weaker EBITDA margins. The firm reported first-half organic revenue growth of 0.5% year over year versus our full-year projection of a 0.1% decline. We are maintaining our NOK 164 per local share fair value estimate and narrow moat rating. We believe the shares are fairly valued.

Telenor’s fiber service continues to expand within the home market of Norway, adding 10,000 subscribers in the quarter and helping to increase fixed Internet average revenue per user, or ARPU, to NOK 383 from NOK 374 a year ago. The firm also introduced a fixed mobile broadband product and acquired spectrum licenses for 2x10 MHz in the 700 MHz band. Mobile subscriptions fell by 19,000 in the quarter as the addition of 8,000 postpaid consumer subscribers was more than offset by the ongoing decline in the prepaid side of the business and the loss of some public contracts. However, overall subscription and traffic revenue improved due to higher ARPUs for postpaid customers. Total revenue in the country fell by 3% to NOK 6.3 billion as the continued deterioration in legacy product revenue and lower hardware revenue offset the growth in fiber and mobile.

Bangladesh remains one of the main drivers of growth as revenue grew by 13% year over year, driven by improvement in both subscribers and ARPU. Grameenphone added 1.3 million subscribers in the quarter, and the firm now has over 75 million subscribers. ARPU improved by 4% to NOK 16 versus the second quarter a year ago. After excluding provisional commission payments, adjusted EBITDA margin improved to 62% from 60% last year. Grameenphone continues to invest in its network, adding over 1,500 4G sites in the quarter, raising its total number of 4G sites to 7,500.

Overall revenue in Pakistan fell in the quarter to NOK 1.6 billion from NOK 1.9 billion due to a Supreme Court ban on telco specific charges. Excluding the 10% service charge, subscription and traffic revenue grew 9%, driven by 8% growth in ARPU. Despite the loss of the service charge, we agree with management’s contention that revenue in Pakistan should to continue to grow from higher ARPU and increased monetization of data usage as smartphone penetration remains low and only 50% of customers are currently using data.

Management provided an update on the firm’s ongoing M&A activity. The purchase of 54% of Finnish operator DNA was approved by the EU Commission, and Telenor expects the deal to close in August pending approvals in Finland. Post-closing, the firm plans to launch a mandatory tender offer at EUR 20.90, the same price that it purchased the 54% stake from the two main shareholders. With respect to the Asian operations, Telenor remains in discussions with Axiata about a noncash merger of the firms' respective Asian businesses. Management reiterated its belief that the merger could bring $5 billion in synergies and its plan to conclude discussion in the third quarter. Regulatory approval could take up to a year after an agreement is in place.