Morningstar | Telia Reports Mixed 2Q Results; Organic Growth Remains Challenging
Telia posted a mixed second quarter, as revenue came in slightly below consensus but EBITDA met expectations. The firm reported revenue growth of 2% year over year, driven entirely by acquisitions and foreign exchange. We are maintaining our SEK 40 fair value estimate and narrow moat rating. We believe the shares are fairly valued.Excluding foreign exchange and M&A, revenue declined 4%, due in part to ongoing weakness in the home market and other Nordic countries. Revenue in Sweden fell 5% to SEK 8.6 billion due to lower equipment sales and a 1% decline in service revenue. The fall in service revenue was largely due to the ongoing pressure on fixed telephone and fiber installation revenue. While mobile subscriptions improved by 65,000, the growth was driven by 45,000 machine-to-machine postpaid net adds and 23,000 prepaid net adds, implying a net loss of 3,000 nonmachine postpaid subscribers. This is the third straight quarter of nonmachine postpaid losses for the firm, further evidence of the increased competition in Sweden.
Revenue in Finland fell 1.9% on an organic basis to SEK 3.9 billion on lower equipment sales and slightly lower service revenue. The 1% drop in organic service revenue was largely attributed to the ongoing decline in fixed telephony, with the copper network being taken out of service. Telia also suffered a net loss of 7,000 mobile subscriptions in Finland driven by a net loss of 15,000 nonmachine postpaid subscribers. In Norway, organic revenue dropped by 4% to SEK 3.7 billion despite flat organic service revenue. Telia added 14,000 postpaid subscribers with only 5,000 machine-to-machine net adds.
Due to the implementation of IFRS 16, which requires leases to be included in EBITDA, Telia’s reported adjusted EBITDA margin of 35.4% is inflated versus historical margins. Our estimate is that excluding the accounting change, foreign exchange, and M&A, adjusted EBITDA margin would have been 31.7% versus 31.0% a year ago.
Telia Company provides telecommunication services in the Nordic and Baltic countries, the markets of Eurasia, including Russia, Turkey and Spain. Co. has three business segments: Mobility Services, which comprises operations in Sweden, Finland, Norway, Denmark, Lithuania, Latvia, Estonia and Spain; Broadband Services, which comprises operations in Sweden, Finland, Denmark, Lithuania, Latvia (49.0%), Estonia and international carrier operations; and Eurasia, which comprises mobile operations in Kazakhstan, Azerbaijan, Uzbekistan, Tajikistan, Georgia, Moldova and Nepal. The business area also includes Co.'s shareholdings in OAO MegaFon, Russia and Turkcell Iletisim Hizmetleri A.S., Turkey.
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