Morningstar | Telia Reported In-Line 2Q Results After Adjusting for Currency Movements; Shares Fairly Valued
Telia reported an impressive-looking second-quarter revenue growth rate of 5.2% year over year. However, most of this gain was currency-related. In local currency terms, revenue increased 1.3%. Just as we haven’t panicked and reduced our fair value estimate when currency moved against Telia, we aren’t going to increase it now that currency movements have gone in its favour. Thus, we maintain our SEK 40 fair value estimate and narrow moat rating. We believe the shares are fairly valued.In Sweden, its largest operation, Telia generated revenue growth of 3.2%, representing one of the best quarters it has had for several years. However, all of the improvement was from equipment sales, which are volatile and generally low-margin. Thus, its EBITDA margin decline to 35% from 35.7% in the year-ago period. Its wireless business increased its revenue by 1.9%, but this was more than offset by a 20.8% decline in its fixed-line business. With Tele2 likely closing on its acquisition of Com Hen in the second half, we expect more competition in Sweden next year.
In Finland and Norway, reported revenue was up sharply, but mostly from currency movements. In local currency, revenue increased slightly. After Tele2’s strong revenue growth in the Baltic countries, we were disappointed with Telia’s lower growth rates, though its EBITDA margins were up nicely. Overall, its EBITDA margin was 31%, which is behind our full-year projection of 32.9%, but it is ahead of the year-ago period, and the second quarter historically has the lowest EBITDA margin of the year.
Telia also announced that it has agreed to acquire Bonnier Broadcasting for SEK 9.2 billion. Bonnier owns brands TV4, C More, and Finnish MTV, which should increase its video content for its pay-TV service. We think the deal is expensive at 15.4 times enterprise value/EBIT, but not large enough to change our fair value estimate.
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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