Discount Brand Reliance And AI Efficiencies Will Shape A Cautious Telecom Outlook

Catalysts

About NOS S.G.P.S

NOS S.G.P.S is a Portuguese telecom and media operator focused on fixed and mobile connectivity, audiovisual content, and related IT and digital services.

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

• Growing reliance on discount brands to defend market share in a saturated domestic market risks a structurally lower blended ARPU. This could cap revenue growth and weigh on earnings quality if price competition persists.
• The expanding gigabit fiber footprint, increasingly supported by third party networks, may deliver slower than expected customer take up and weaker pricing power in newly covered areas. This could limit the uplift to top line and pressure returns on incremental network investment.
• Transformation and AI driven efficiency gains are already a major contributor to EBITDA. This raises the bar for future cost savings and leaves less room for additional margin expansion once the current wave of initiatives matures.
• Volatility and structural headwinds in the Audiovisuals and Cinema division, highlighted by sharp revenue swings tied to blockbuster timing, could continue to drag consolidated revenue growth and dilute overall net margin resilience.
• Free cash flow is sensitive to tax and one off items at a time when leverage is already low. As a result, further balance sheet de risking provides limited incremental upside and could constrain future earnings and dividend growth relative to past years.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming NOS S.G.P.S's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.2% today to 10.2% in 3 years time.
• Analysts expect earnings to reach €194.7 million (and earnings per share of €0.37) by about December 2028, down from €253.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €235.4 million in earnings, and the most bearish expecting €157.3 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 13.7x on those 2028 earnings, up from 7.6x today. This future PE is greater than the current PE for the GB Telecom industry at 4.9x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued ARPU erosion from the growing mix of discount brand customers and the lack of recent price increases could outweigh RGU growth, leading to lower revenue and constraining net margin expansion over time.
• If the Audiovisuals and Cinema division faces a prolonged weak blockbuster pipeline rather than just quarter specific gaps, the structurally lower cinema attendance could become a persistent drag on consolidated revenue and earnings.
• Gen AI driven efficiency gains are currently a major driver of EBITDA growth, but as more of the 135 identified use cases are implemented, the marginal benefit may diminish, limiting further cost savings and slowing future net income growth.
• As FTTH network expansion matures and shifts further onto third party networks, the initial growth from new households passed may slow while competitive intensity remains high, reducing the long term uplift to revenue and pressuring margins.
• The recent sharp fall in free cash flow due to higher taxes on extraordinary gains and fading tower sale benefits highlights how sensitive cash generation is to non recurring items, raising the risk that future dividends or deleveraging capacity could lag earnings growth.

Valuation

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

• The analysts have a consensus price target of €4.07 for NOS S.G.P.S 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 €5.0, and the most bearish reporting a price target of just €3.1.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.9 billion, earnings will come to €194.7 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of €3.76, the analyst price target of €4.07 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.