Legacy Telecom Decline And Rising Energy Expenses Will Constrain Outlook

Key Takeaways

• Structural decline in legacy services and intense digital competition threaten Telia's revenue growth and compress margins despite diversification efforts.
  
• Overexposure to stagnant regional markets and rising operational costs from energy and regulation heighten risks of lagging financial performance.
  
• Strong cost controls, digital infrastructure investments, and prudent capital allocation are driving stable growth, improved margins, and enhanced appeal for long-term and income-focused investors.

Catalysts

Provides communication services to businesses, individuals, families, and communities in Sweden, Finland, Norway, Denmark, Lithuania, Estonia, and Latvia.

• The accelerating shift toward digital over-the-top platforms and pervasive cord-cutting is structurally eroding demand for Telia's legacy telecom and TV/media businesses, which threatens to suppress core service revenues and drag overall revenue growth well below sector averages for the foreseeable future.
  
• Persistently high and rising energy costs, coupled with the tightening implementation of EU carbon taxation, are expected to drive Telia's operational expenses higher, further compressing operating margins and increasing the risk of net margin erosion over the long term.
  
• Continued exclusive focus on the mature and demographically stagnant Nordic and Baltic regions exposes Telia to low-growth markets where population decline and urbanization are projected to limit subscriber growth and result in revenue growth that consistently lags more geographically diversified peers.
  
• The accelerated decline in legacy voice and copper DSL products is outpacing the growth of new digital and connectivity services, causing margin compression even as Telia attempts to diversify, and raising the risk of structurally negative impacts on future earnings.
  
• Escalating competitive pressure from non-traditional technology firms and new digital entrants is expected to commoditize Telia's connectivity and cloud offerings, leading to intensified price competition and sustained downward pressure on average revenue per user, margins, and overall earnings growth.

Telia Company Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Telia Company compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Telia Company's revenue will decrease by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 9.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 7.7 billion (and earnings per share of SEK 1.96) by about July 2028, up from SEK 5.4 billion today. The analysts are largely in agreement about this estimate.
• 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 15.9x on those 2028 earnings, down from 26.0x today. This future PE is lower than the current PE for the GB Telecom industry at 29.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.91%, as per the Simply Wall St company report.

Telia Company Future Earnings Per Share Growth

Risks

• The continued strong execution of cost efficiency programs and organizational streamlining is driving lower operating expenses, resulting in EBITDA margin expansion and improved net margins, which could counter a share price decline.
  
• Strategic focus on convergence and bundling premium services, especially in Sweden, has led to steady ARPU growth and drastically reduced churn, supporting stable or increasing revenues over the long term.
  
• Prudent capital allocation, including successful divestments, targeted acquisitions (like Bredband2), and disciplined CapEx below guidance, has reduced leverage and improved free cash flow conversion, strengthening the balance sheet and enhancing financial flexibility for future dividends and reinvestment.
  
• Investments in 5G, fiber infrastructure, and digital services (such as private networks and cybersecurity) are fueling growth in enterprise and consumer segments, positioning Telia to capture long-term demand from secular digitalization trends and supporting revenue and earnings growth.
  
• Commitment to maintaining and growing dividends backed by improving free cash flow and a strengthened balance sheet increases the company's attractiveness to income-focused investors, potentially supporting the share price despite cyclical or regional operational challenges.

Valuation

• The assumed bearish price target for Telia Company is SEK27.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Telia Company'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 SEK47.0, and the most bearish reporting a price target of just SEK27.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK81.0 billion, earnings will come to SEK7.7 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 4.9%.
  
• Given the current share price of SEK35.52, the bearish analyst price target of SEK27.0 is 31.6% lower. Despite analysts expecting the underlying buisness 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.