Cost Efficiencies And 5G Rollout Will Refine Market Presence

Key Takeaways

• Workforce and contract restructuring efforts are set to streamline operations and enhance net margins for improved future earnings.
  
• Completion of the 5G network and price increases in Sweden are anticipated to boost revenue growth and customer acquisition.
  
• Increased competition, regulatory uncertainty, and reliance on cost control might hinder Tele2's revenue and earnings growth in the Swedish market.

Catalysts

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

• Tele2's transformation efforts, including workforce reduction and renegotiating large contracts, aim to streamline operations and enhance efficiency. This is expected to positively impact net margins and future earnings.
  
• The launch and completion of the Net4Mobility 5G network by year-end, which offers the largest broadband reach in Sweden, could drive future revenue growth and customer acquisition.
  
• Tele2's focus on improving customer experience and expanding distribution channels, including new stores and a revamped website, is intended to boost revenue growth.
  
• Price increases, particularly in mobile and fixed broadband services, are anticipated to contribute to higher revenue growth in Sweden.
  
• Strong performance and growth in the Baltics, driven by price adjustments and cost control, are expected to further improve EBITDA and cash conversion rates, thus enhancing earnings stability.

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 17.0% in 3 years time.
• Analysts expect earnings to reach SEK 5.3 billion (and earnings per share of SEK 7.8) by about April 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 20.0x on those 2028 earnings, down from 24.7x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.25% 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 decline in Boxer TV's revenue due to the decommissioning of terrestrial distribution negatively impacted Swedish consumer end-user service revenue and could continue to affect overall revenue growth.
  
• Increased competitive pressure in the Swedish market, with a focus on promotions and discounts, might limit Tele2's ability to implement pricing adjustments effectively, affecting revenue and margins.
  
• The planned workforce reductions and cost-cutting measures entail restructuring costs (SEK 500 million projected for the year), which might offset some of the short-term financial benefits, impacting net margins.
  
• The dependence on cost control and contract renegotiations for achieving EBITDAaL growth presents a risk if efficiencies and savings are not fully realized, possibly affecting earnings.
  
• Uncertain regulatory developments in the Swedish broadband market could impact operational costs and revenue strategies if the expected favorable changes do not materialize.

Valuation

• The analysts have a consensus price target of SEK133.04 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 20.0x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of SEK136.6, the analyst price target of SEK133.04 is 2.7% 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.