EUR 850.00 For Business Accounts Only

Morningstar | Telia Reports Weak 4Q Revenue and EBITDA Margin but Strong Free Cash Flow; Shares Fairly Valued

Telia reported fourth-quarter revenue and EBITDA margin below our expectations but strong free cash flow. While the weakness provides some concerns, 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 grew 4.9% year over year in the quarter, but this was all currency driven. On an organic basis, revenue declined 2.9%. This brought full-year revenue growth to 4.7% versus our projection of 7.3%.

Most of the revenue shortfall came from weak fixed-line telephone results in Sweden, Denmark, and Lithuania. In Sweden, which accounts for about 44% of the firm’s revenue, revenue fell 3.3% in the quarter. While mobile revenue increased 1.1%, fixed-line revenue dropped 3.8%, which was more than we anticipated. Tele2 recently acquired Com Hem, the largest cable TV operator in the country, creating a strong convergent competitor. Thus, we expect the fixed-line business will continue to struggle.

Denmark is a smaller country with low margins, so we are less concerned about its weak fixed-line business. However, we are concerned about Lithuania, which has been one of the firm’s main growth drivers for the past four years. The wireless business remained strong with revenue growth of 16.3%, but the fixed-line business fell enough to more than offset the wireless growth, taking organic revenue down 2.6%. While we no longer expect much revenue growth from Lithuania, we believe the firm as a whole can increase revenue slightly going forward.

Telia’s cost-cutting was also behind our expectations, with the firm generating an adjusted EBITDA margin of 30.3% for the quarter and 31.9% for the year versus our projection of 32.9%. However, the company succeeded in increasing its free cash flow to SEK 1.4 billion in the quarter and SEK 11.9 billion for the year. We believe this higher free cash flow offsets the shortfall elsewhere.

During the fourth quarter, Telia succeeded in selling its stakes in Ucell in Uzbekistan and Kcell in Kazakhstan. With these transactions complete, the firm has successfully exited from most of its Eurasian assets. Management should now be able to fully focus on running the business.