Cost Pressures And Transformation Risks Will Undermine Benefits Of 5G And Fiber Investments

Catalysts

About Elisa Oyj

Elisa Oyj is a Finnish telecom and digital services company with operations in mobile, fixed broadband, corporate IT and cyber services, and international software services.

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

• Intense competition in low speed 4G, combined with Elisa's commitment to remain a "responsible market leader" rather than aggressively cutting prices, could limit the ability to pass on future cost inflation. This may cap mobile service revenue growth and put pressure on EBITDA margins.
• The planned transformation program targets €40 million of annual cost savings by 2026, but relies heavily on headcount reductions and process changes across Consumer, Corporate, TechOps and Corporate Functions. This could disrupt operations, slow execution in growth areas and reduce the quality of service, with potential drag on revenue and earnings if implementation is rocky.
• International Software Services currently shows project delays due to tariff related uncertainties, and a higher share of recurring revenue means less exposure to large upfront license and service fees. As a result, future swings in customer project timing could soften top line growth while fixed cost commitments weigh on net margins.
• Large 5G and fiber investments kept within a 12% CapEx to sales envelope require sustained customer monetisation through upselling and new services such as security features. Any slowdown in customer take up or higher churn in these categories could weaken returns on invested capital and limit earnings expansion.
• Growing exposure to energy related digital solutions, such as home battery offerings and grid scale flexibility tools like Gridle, ties part of the business to regulatory decisions and project based demand. Delays or smaller than expected rollouts would dampen revenue growth in these newer segments and reduce the diversification benefit to group EBITDA.

Assumptions

This narrative explores a more pessimistic perspective on Elisa Oyj 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 Elisa Oyj's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.3% today to 17.3% in 3 years time.
• The bearish analysts expect earnings to reach €409.5 million (and earnings per share of €2.54) by about January 2029, up from €366.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €453.6 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 15.4x on those 2029 earnings, down from 16.1x today. This future PE is lower than the current PE for the GB Telecom industry at 16.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.85%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Mobile service revenue grew 3.3% in the quarter, helped by 5G upselling and new security features with around 600,000 customers enrolled. This suggests that if this higher value mix continues it could support service revenue and EBITDA rather than lead to a weakening.
• International Software Services revenue grew roughly 53% and recurring revenue in that segment grew 13% in the quarter and 15% year to date. If this recurring base keeps expanding it could provide a more stable and growing contribution to revenue and earnings than a bearish case assumes.
• Fixed services, including fiber broadband and corporate network contracts, are now contributing to service revenue growth. The company is continuing fiber and 5G network build within a 12% CapEx to sales envelope, which could support long term revenue and potentially protect net margins if customer demand holds up.
• The €40 million annual cost savings program targeted for 2026, following earlier headcount reductions in 2024, is aimed at productivity and process simplification. If these measures are executed without hurting service quality they could support EBITDA margins and earnings more than a pessimistic view allows for.
• Corporate IT and cyber services, including a multi country cybersecurity contract with Kesko and growth in energy related offerings like home batteries and the Gridle grid scale solution, could open additional long term growth avenues that support revenue and diversify earnings away from more competitive 4G mobile tiers.

Valuation

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

• The assumed bearish price target for Elisa Oyj is €33.0, which represents up to two standard deviations below the consensus price target of €42.76. This valuation is based on what can be assumed as the expectations of Elisa Oyj'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 €57.0, and the most bearish reporting a price target of just €33.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €2.4 billion, earnings will come to €409.5 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of €36.68, the analyst price target of €33.0 is 11.2% lower. Despite analysts expecting the underlying business 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.