EUR 850.00 For Business Accounts Only

Morningstar | Telia Reports In-Line 1Q Results; Shares Fairly Valued

Telia reported first-quarter results that were generally in line with our expectations, and we don’t expect to make any significant changes to our SEK 40 fair value estimate. Our narrow moat rating is intact, and we believe the shares are fairly valued. The firm reported revenue growth of 5% year over year versus our full-year projection of 5.2%. However, this growth is almost all driven from acquisitions and foreign exchange gains.

In last year’s fourth quarter, Telia closed on the acquisitions of GET and TDC Norway, which boosted first-quarter revenue in Norway by 38.9%. However, without the acquisitions and currency movements, revenue declined 4.1% in the country. This was the case in several countries: Without currency gains, revenue would have declined. The main exception was Estonia, where the firm performed well, with revenue growth of 6% excluding currency movements. Including currency gains, revenue increased 10.9%. Competition has increased in many of Telia’s markets from Tele2 and Telenor, and we expect organic revenue growth will generally be difficult to achieve.

In its largest market of Sweden, which accounts for about 41% of revenue, Telia’s revenue fell 4.3%. While part of this was from lower handset sales, the biggest chunk was due to a 21.4% loss in its fixed-line subscriber base to 1 million. On the wireless side, the firm’s subscriber base was basically flat, but lower average revenue per user pushed wireless service revenue down 1.5%. We expect these trends to continue. The positive side was that Telia launched the first industrial 5G application with Volvo Construction Equipment and signed an agreement to serve 900,000 electricity meters through its narrow-band Internet of Things network. While these deals won’t drive much revenue in the short term, they are signs of potential for longer-term growth.

Due to the implementation of IFRS 16, which requires leases to be included in EBITDA, Telia’s reported EBITDA margin of 35.8% is inflated versus historical EBITDA margins. Our estimate from what the firm disclosed is that excluding the accounting change, as our forecast does, adjusted EBITDA margin would have been 32.4%, comparable to our full-year projection of 32.5%. Telia is also undergoing some structural adjustments that it expects will reduce its costs by about 2% by the end of the year, which helps drive our expectation for future margin expansion.