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Morningstar | Telenor Reports Mixed 3Q Results With Weak Revenue but Strong Margins; Shares Fairly Valued

Telenor reported mixed third-quarter results, with revenue a bit light but improved EBITDA margins. We expect these items will pretty much offset each other and don’t expect to change our NOK 164 per local share fair value estimate. Our narrow moat rating is unchanged, and we believe the shares are fairly valued. Once again, our expected revenue decline of 6.4% for the full year appears much worse than the company’s reported revenue growth of 0.4%. However, the company sold its operations in Hungary, Bulgaria, Serbia, and Montenegro during the quarter. Telenor reported pro forma results as if these operations were sold at the end of 2016, while we included them through the second quarter of 2018. Adjusting for this difference, we think our revenue expectations for the fourth quarter are probably a bit high.

The firm’s operations in Bangladesh once again were the star as the division added 2.2 million wireless subscribers during the quarter, a 12% jump from the year-ago period. Net, the rest of the firm lost customers during the quarter, with particularly large hits in Myanmar, Thailand, and Pakistan. A fourth operator has entered Myanmar, which led to not only the loss of 1 million subscribers but an 8% drop in average revenue per user. This accounts for the main difference from our expectations. We now expect Myanmar will struggle next year as well, while we anticipate improvement in Pakistan and stabilization in Thailand in 2019.

Telenor has been more successful at reducing costs than we projected and generated an adjusted EBITDA margin of 44.8%, above our 40.4% estimate. Part of this is due to the lower-margin operations that were sold and part due to seasonality, as the fourth quarter historically has a lower margin. Thus, we don’t expect the final differential to be that large.

In Telenor's home country of Norway, revenue grew 1% and the company added net wireless subscribers for the first time in three years. However, competition is increasing in Norway and Sweden. In Norway, Telia acquired TDC’s operations, and in Sweden, Tele2 will shortly acquire Com Hem, the largest cable television operator in the country. These acquisitions provide the firms the ability to compete as converged operators. We expect this will keep growth down in the Nordic markets.