Investments In 5G And Digitalization Will Drive Future Operational Efficiency

Key Takeaways

• Tele2's transformation plan emphasizes profitability through cost optimization, leading to enhanced cash flow and net margin improvements via workforce reductions.
  
• Investment in 5G and digitalization aims to drive revenue growth and improve margins by enhancing customer experience and service efficiency.
  
• Tele2 faces challenges with sustainability in earnings, financial flexibility, potential operational disruptions, and costly funding, impacting profitability and growth opportunities.

Catalysts

Provides fixed and mobile connectivity, handset related data services, and entertainment services in Sweden, Lithuania, Latvia, and Estonia.

• Tele2's transformation plan for 2025 focuses on improving profitability through cost optimization, stricter prioritization, and a simplified organization, which is expected to enhance EBITDAaL and cash flow. (Impacts earnings and margins)
  
• The company plans to cut approximately 15% of its workforce, which should significantly reduce OpEx, contributing to bottom-line improvements. (Impacts net margins and earnings)
  
• Tele2's investment in 5G rollout and infrastructure, including a continued focus on expanding it, aims to drive future revenue growth by enhancing customer experience and service capabilities. (Impacts revenue and future cash flow)
  
• The completion of the Boxer TV migration to more modern platforms in 2025 is expected to stabilize revenue from TV services in the long-term despite an immediate impact, with potential improvements in customer satisfaction and profitability. (Impacts revenue)
  
• The focus on digitalizing and automating service delivery in the B2B segment aims to stabilize fixed line revenues and improve service efficiency, potentially leading to better margins. (Impacts revenue and margins)

Tele2 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tele2's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 16.9% in 3 years time.
• Analysts expect earnings to reach SEK 5.3 billion (and earnings per share of SEK 7.8) by about March 2028, up from SEK 3.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK4.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, down from 23.3x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 23.3x.
• Analysts expect the number of shares outstanding to grow 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 4.76%, as per the Simply Wall St company report.

Tele2 Future Earnings Per Share Growth

Risks

• The 7% decrease in equity free cash flow in 2024 raises concerns about Tele2's ability to sustain or grow earnings, which may influence future dividend policies.
  
• The company plans a 15% workforce reduction in 2025, which although aimed at improving profitability, risks potential operational disruptions or impacts on service quality, potentially affecting revenue.
  
• Tele2's end-user service revenue growth in Sweden was only 1% in Q4 2024, partly due to the final phase of Boxer TV migration. The resultant loss of SEK 200 million in revenue for 2025 highlights challenges in maintaining a stable revenue stream from existing services.
  
• Funding costs are noted as expensive, posing risks to future profitability and cash flow management, which could ultimately impact net margins.
  
• The proposed dividend payout of 100% of equity free cash flow leaves little room for financial flexibility, potentially impacting the company's ability to invest in growth opportunities or weather financial challenges.

Valuation

• The analysts have a consensus price target of SEK125.14 for Tele2 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 SEK160.0, and the most bearish reporting a price target of just SEK102.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK31.4 billion, earnings will come to SEK5.3 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 4.8%.
• Given the current share price of SEK129.0, the analyst price target of SEK125.14 is 3.1% lower. 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.