Intensifying Competition And Slowing Fiber Rollout Will Pressure Earnings And Margins In Coming Years

Catalysts

About Koninklijke KPN

Koninklijke KPN is a Dutch telecommunications provider focused on fixed and mobile connectivity, business ICT services and wholesale network access.

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

• Intensifying competition in Dutch fixed broadband and mobile, including higher speed cable offers and fixed wireless access alternatives, is likely to force sharper discounting and richer retention incentives. This may cap service revenue growth well below the company’s 3 percent ambition and erode long term earnings momentum.
• As fiber coverage approaches the stated 80 percent household ambition, incremental rollout becomes more complex and capital intensive while growth in new connections slows. This risks weaker returns on network investments and limits future uplift in revenue and free cash flow once the current build phase tapers.
• Persistent price pressure in B2B mobile, particularly in larger corporates and public sector frameworks, threatens to normalize ARPU at lower levels just as wage inflation and transformation costs remain high. This may compress adjusted EBITDA margins over the next several years.
• Reliance on high growth niches such as international sponsored roaming and IoT to offset slowing core access revenues leaves the company exposed if these volumes normalize or regulators constrain roaming economics. This would reduce top line growth and dampen operating leverage.
• Ongoing workforce reductions and operating model simplification, while necessary, may struggle to fully offset structural cost headwinds from energy, labor and higher cash taxes. As a result, the targeted 7 percent average free cash flow growth may prove unsustainable beyond the current planning period.

Assumptions

This narrative explores a more pessimistic perspective on Koninklijke KPN compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Koninklijke KPN's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.5% today to 17.1% in 3 years time.
• The bearish analysts expect earnings to reach €1.0 billion (and earnings per share of €0.27) by about December 2028, up from €781.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.2 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, down from 18.9x today. This future PE is lower than the current PE for the GB Telecom industry at 18.9x.
• The bearish analysts expect the number of shares outstanding to decline by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained execution of the Connect, Activate and Grow strategy, including leadership in Dutch fiber and consistent net adds in both fixed and mobile, could support mid single digit growth in service revenues and adjusted EBITDA, which would underpin resilient earnings over the medium term.
• Continued strength in operational free cash flow, already up double digits year to date with management reiterating a 7 percent CAGR ambition, combined with disciplined CapEx and an expected step down in fiber investment after 2026, could keep free cash flow per share growing and support shareholder returns.
• Structural improvements in customer satisfaction and churn, evidenced by rising Net Promoter Scores in both consumer and business segments and lower broadband churn, may translate into a more stable or higher ARPU mix and healthier net margins over time.
• Ongoing mix shift toward higher value services such as fiber broadband, SME cloud and security offerings, IoT and CPaaS, along with growing wholesale mobile and sponsored roaming, could diversify and expand revenue streams, improving earnings durability even if some legacy lines decline.
• A strong balance sheet with leverage around the self imposed ceiling, solid liquidity, limited exposure to floating rates and active capital return via dividends and buybacks may reduce financial risk, helping to stabilize valuation multiples and support earnings per share.

Valuation

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

• The assumed bearish price target for Koninklijke KPN is €3.05, which represents up to two standard deviations below the consensus price target of €4.22. This valuation is based on what can be assumed as the expectations of Koninklijke KPN's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €5.3, and the most bearish reporting a price target of just €2.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €6.0 billion, earnings will come to €1.0 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of €3.86, the analyst price target of €3.05 is 26.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.