Network Investments And Software Services Will Drive Long Term Earnings Quality

Catalysts

About Elisa Oyj

Elisa Oyj is a Nordic telecommunications and digital services company focused on mobile and fixed connectivity, software driven services and cybersecurity solutions.

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

• Accelerated rollout of value added mobile offerings, such as bundled security services and 5G upgrades, is deepening monetization of the existing subscriber base, which should support mobile service revenue growth and stabilize earnings despite pressure in low end 4G tiers.
• Ongoing fiber and 5G network investments, maintained within a disciplined 12 percent CapEx to sales range, position Elisa to capture structurally rising demand for high speed data and data center connectivity, underpinning long term revenue expansion and resilient EBITDA margins.
• The transformation program targeting 40 million euros of annual cost savings by 2026, combined with increased use of automation and AI, is set to structurally lower the operating cost base and provide upside to EBITDA margin and cash flow conversion as benefits phase in from 2025 onward.
• Scaling of international software services, including energy flexibility solutions such as Gridle and increasing recurring revenue streams, should drive higher quality, less cyclical topline growth and operating leverage, lifting group EBITDA and earnings as project timing headwinds ease.
• Strengthening position in corporate IT and cyber security, evidenced by large multi country wins like Kesko, taps into growing enterprise demand for resilient digital infrastructure, supporting higher margin B2B service revenue and improving overall group profitability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Elisa Oyj's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.3% today to 18.0% in 3 years time.
• Analysts expect earnings to reach €430.8 million (and earnings per share of €2.76) by about December 2028, up from €366.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €526.0 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 20.1x on those 2028 earnings, up from 16.5x today. This future PE is greater than the current PE for the GB Telecom industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intensifying price competition in low speed 4G tiers, already visible in elevated post paid churn above 22 percent and a decline of more than 20,000 post paid subscriptions, could structurally cap pricing power and slow mobile service revenue growth, limiting the uplift to group revenue.
• If the competitive pressure in Finnish mobile persists into 2026 and forces Elisa to match more aggressive discounting to defend its number one market share, the required price concessions could erode the benefit of the new security bundled offerings and weigh on net margins.
• Delays in international software projects linked to tariff related uncertainties may continue beyond 2025, reducing high margin license and services income and slowing the transition toward higher recurring software revenues, which would dampen earnings growth.
• The EUR 40 million transformation and cost reduction program depends on successful organizational streamlining and automation, and if execution is slower or restructuring costs higher than expected, the net savings may fall short and constrain future EBITDA margin expansion.
• While fiber and data center connectivity show long term growth potential, any macro slowdown or weaker than expected demand for high speed fixed and data center services could limit the anticipated upside from fixed service revenue and delay improvements in profitability and earnings.

Valuation

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

• The analysts have a consensus price target of €45.48 for Elisa Oyj based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €60.0, and the most bearish reporting a price target of just €37.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €2.4 billion, earnings will come to €430.8 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of €37.62, the analyst price target of €45.48 is 17.3% 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.