Digital Transformation Will Streamline Nordic Telecoms

Key Takeaways

• Telia's focus on digital transformation and restructuring non-core operations enhances efficiency and profitability, supporting margin improvement.
  
• Strategic pricing initiatives and ambitious cash flow targets aim to drive sustained revenue growth and earnings stability.
  
• Regulatory changes and competition pressures in key markets could negatively impact Telia's revenue growth, EBITDA, and cash flow, despite efforts to improve efficiencies.

Catalysts

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

• Telia's change program aims to transform the company into a more customer-focused, faster, and efficient operator, targeting efficiencies of at least SEK 2.6 billion, which is expected to improve net margins.
  
• The strategic focus on digital transformation in TV and Media has resulted in positive developments in service revenue and EBITDA, which could further boost earnings growth.
  
• There is an ongoing focus on profitable growth driven by pricing initiatives, which could increase revenues in the coming years.
  
• Telia's decision to ramp down non-core and low-margin businesses like the e-invoicing in Finland contributes to better margin management, potentially enhancing net margins.
  
• Upgraded financial ambitions, including a target for all-in free cash flow of at least SEK 10 billion by 2027, signal a forward-looking focus on cash flow generation, potentially increasing earnings stability.

Telia Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telia Company's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 8.8% in 3 years time.
• Analysts expect earnings to reach SEK 8.1 billion (and earnings per share of SEK 2.02) by about December 2027, up from SEK 1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK 9.7 billion in earnings, and the most bearish expecting SEK 6.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.7x on those 2027 earnings, down from 115.3x today. This future PE is lower than the current PE for the GB Telecom industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.5%, as per the Simply Wall St company report.

Telia Company Future Earnings Per Share Growth

Risks

• Regulatory changes and legacy pressures in Finland and Norway continue to impact service revenue growth negatively, potentially affecting overall revenue targets.
  
• An anticipated decline in the revenue from the national roaming contract with ICE in Norway, as it transitions to another network, could affect future earnings from wholesale operations.
  
• Pressure on business solutions, notably in Sweden and Lithuania, due to special items that inflated past growth rates, may negatively impact EBITDA growth in the future.
  
• Restructuring costs and increased lease and tax expenses present financial burdens that could impair structural operating cash flow amid efforts to increase efficiencies.
  
• Stiff competition and low pricing in the enterprise segment could undermine efforts to improve ARPU and service revenue growth, impacting net margins in competitive markets like Sweden and Finland.

Valuation

• The analysts have a consensus price target of SEK 33.07 for Telia Company 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 SEK 45.0, and the most bearish reporting a price target of just SEK 22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 92.3 billion, earnings will come to SEK 8.1 billion, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 4.5%.
• Given the current share price of SEK 30.8, the analyst's price target of SEK 33.07 is 6.9% 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.