Fiber Saturation And AI Cost Cuts Will Pressure Margins And Earnings Over Time

Catalysts

About NOS S.G.P.S

NOS S.G.P.S is a Portuguese telecom and media group with operations across fixed and mobile connectivity, IT services and cinema and audiovisual distribution.

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

• The push to complete fiber coverage close to current levels, with the remaining households expected to be served by a state backed project, can limit NOS' ability to differentiate its fixed network in the long run and may cap pricing power in broadband, which could weigh on revenue growth.
• Management is already planning for lower CapEx in 2026 compared with 2025, helped by AI efficiency gains. If this is pursued too aggressively, it could slow network quality upgrades over time and risk putting pressure on customer growth and ARPU, with knock on effects for earnings.
• The SCAILE AI program targets ongoing OpEx efficiencies. However, relying heavily on automation and potential headcount rationalisation may face execution bottlenecks and cultural pushback, which could limit the cost savings needed to support further margin expansion and net income.
• IT services are described as growing, with exposure to areas such as cloud and cybersecurity. The business also includes a volatile resale component with lower margins, so a weaker mix or slowdown in one off projects could drag on overall IT revenue and EBITDA contribution.
• The aggressive competitive intensity in Portuguese consumer telecom since late 2024, combined with the growing weight of low end brand WOO, increases the risk that NOS needs to lean more on discounts and lower ARPU offers to defend its 10.9 million RGUs. This could erode net margins and free cash flow.

Assumptions

This narrative explores a more pessimistic perspective on NOS S.G.P.S 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 NOS S.G.P.S's revenue will grow by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.5% today to 9.2% in 3 years time.
• The bearish analysts expect earnings to reach €176.9 million (and earnings per share of €0.34) by about March 2029, down from €245.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €288.4 million.
• 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 11.9x on those 2029 earnings, up from 11.2x today. This future PE is greater than the current PE for the GB Telecom industry at 6.7x.
• The bearish analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company reports relatively resilient telecom revenues, a 4.4% increase in IT EBITDA and a 4.3% increase in consolidated EBITDA for 2025, which, if sustained, could translate into steadier revenue and earnings than a bearish view implies.
• Management highlights long term tailwinds in IT services, including cloud, tech consulting and cybersecurity, and describes itself as still bullish on this segment, so continued growth in higher value IT contracts could support revenue and EBITDA even if some resale activity is volatile.
• The SCAILE AI program already covers 140 identified use cases with 40 implemented, alongside a 2.3% OpEx reduction in the quarter, and management expects SCAILE to keep supporting margin expansion, which could underpin net margins and free cash flow rather than compress them.
• Customer focused initiatives such as COMBINA, which already has 150,000 customers, and a 5G and nationwide fiber footprint covering about 6.1 million households with close to 94% coverage, may help limit churn and support RGUs and ARPU, providing some protection for revenue and earnings in a tougher competitive backdrop.
• The company reports a leverage ratio of 1.5x, €342m of cash and liquidity and a lower 2.7% average cost of debt, together with recurring free cash flow growth described as strong, which could support ongoing dividends and reinvestment capacity, easing pressure on net income and free cash flow compared with a more pessimistic scenario.

Valuation

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

• The assumed bearish price target for NOS S.G.P.S is €3.3, which represents up to two standard deviations below the consensus price target of €4.16. This valuation is based on what can be assumed as the expectations of NOS S.G.P.S'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 €5.55, and the most bearish reporting a price target of just €3.3.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €1.9 billion, earnings will come to €176.9 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of €5.36, the analyst price target of €3.3 is 62.4% lower.
  
• 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.