International Expansion And Cloud Demand Will Support Long-Term Earnings Resilience

Catalysts

About Telekom Austria

Telekom Austria, operating under the A1 brand, provides mobile, broadband, TV and digital ICT services across Austria and several international markets.

What are the underlying business or industry changes driving this perspective?

• Continued international outperformance, supported by subscriber growth in mobile postpaid, home internet and TV, is expected to offset domestic weakness. This may support sustained top-line expansion and operating leverage, contributing to revenue and EBITDA.
• Rising demand from enterprises and public institutions for secure, compliant regional cloud and digital solutions positions Exoscale and the broader ICT portfolio to pursue higher value contracts. This can lift average revenue per user and support structurally stronger net margins.
• Scaling of competence delivery centers and the planned digital and ICT service delivery center is designed to deepen automation and shared services efficiency, which may reduce unit operating costs and support earnings resilience even in a competitive pricing environment.
• Persistent demand for high-speed broadband and convergent services, together with disciplined but lower CapEx before spectrum, suggests a more balanced relationship between investment and monetization that can support free cash flow and earnings quality.
• Free cash flow generation and maintained revenue growth guidance provide financial flexibility to fund innovation in digital services and customer experience. This may help reinforce pricing power, support revenue growth and contribute to long-term return on equity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Telekom Austria's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 12.6% in 3 years time.
• Analysts expect earnings to reach €746.7 million (and earnings per share of €1.12) by about December 2028, up from €651.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €670.5 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the GB Telecom industry at 15.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in the core Austrian market, where both revenues and EBITDA are already declining, could outweigh international growth if competitive and macroeconomic pressures deepen. This could ultimately constrain group revenue expansion and put sustained pressure on earnings.
• Intensifying competition in mobile, broadband and convergent services across Central and Eastern Europe could force higher promotional spending and pricing concessions. This could erode average revenue per user and compress net margins despite subscriber growth.
• The long term shift of enterprises toward global hyperscale cloud providers and standardized digital platforms may limit the scale and pricing power of Exoscale and A1's regional ICT offerings. This could reduce the uplift expected from high value B2B contracts and cap both revenue growth and net margins.
• Ongoing transformation programs and the build out of numerous competence and service delivery centers may fail to deliver anticipated efficiencies. This could leave the group with elevated operating costs and CapEx needs that dilute free cash flow and restrain earnings growth.
• A sustained deterioration in macroeconomic conditions across key markets, including pressure on household and public sector budgets, could slow demand for upgrades to high speed broadband and advanced digital services. This could weigh on top line growth and limit operating leverage at the EBITDA level.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €10.18 for Telekom Austria based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €5.9 billion, earnings will come to €746.7 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of €8.62, the analyst price target of €10.18 is 15.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.