TELIA: Disciplined Capital Allocation And Cost Efficiency Will Drive Steady Performance

Key Takeaways

• Strong growth in broadband and bundled services, as well as network upgrades, is enabling Telia to boost revenue, margins, and deepen customer loyalty.
  
• Portfolio focus, digitalization, and cost reductions are improving capital allocation, driving free cash flow and supporting higher shareholder returns.
  
• Digital disruption, stagnant demographics, costly network upgrades, fierce competition, and weak service differentiation threaten Telia's pricing power, revenue growth, and long-term profitability.

Catalysts

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

• Sustained growth in high-speed broadband and mobile data demand, fueled by digitalization of society and adoption of unlimited plans, is leading to recurrent price increases and rising ARPU, especially in Swedish households-positively impacting long-term revenue and profit growth.
  
• Advancing convergence across connectivity, TV, media, and cloud services allows Telia to deepen customer relationships and reduce churn, driving up household ARPU and supporting stable, recurring revenue streams and higher EBITDA margins over time.
  
• Ongoing transformation and portfolio restructuring-such as the exit from non-core markets (Latvia) and targeted acquisitions (Bredband2)-enables more focused capital allocation in core Nordic/Baltic operations, improving earnings quality and enhancing ROE and long-term earnings growth.
  
• Deployment of advanced 5G capabilities and targeted fiber investments presents revenue opportunities across both consumer and enterprise segments, enabling Telia to address emerging IoT and advanced connectivity needs for industry and public sector clients, lifting top-line growth and future profitability.
  
• Continued execution of cost optimization programs and digitalization of internal processes are driving significant operating expense reductions, supporting EBITDA margin expansion and increasing free cash flow, which will underpin future dividend growth and shareholder returns.

Telia Company Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Telia Company's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 12.1% in 3 years time.
• Analysts expect earnings to reach SEK 10.5 billion (and earnings per share of SEK 2.64) by about July 2029, up from SEK 4.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK12.2 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.6x on those 2029 earnings, down from 39.4x today. This future PE is lower than the current PE for the GB Telecom industry at 36.8x.
• 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 5.49%, as per the Simply Wall St company report.

Risks

• Proliferation of over-the-top (OTT) services and ongoing digital disruption continues to reduce the relevance of traditional telco offerings, putting pressure on Telia's ability to maintain pricing power and threatening long-term revenue growth as consumers shift away from bundled or legacy services.
  
• Stagnant or negative demographic trends-like aging populations and limited population growth in core Nordic/Baltic markets-constrain Telia's organic subscriber growth, particularly in mature segments such as Sweden and Finland, potentially capping revenue expansion opportunities.
  
• Substantial ongoing and future CapEx requirements for network upgrades (e.g., 5G/6G, fiber rollouts), coupled with rising environmental and decarbonization regulation costs, risk compressing EBITDA margins and free cash flow as infrastructure investment outpaces immediate monetization opportunities.
  
• Intensifying competition from low-cost MVNO entrants and new digital-native providers creates persistent downward price pressure in mobile and broadband markets, leading to ARPU stagnation and increased churn, especially as technology enables easier unbundling of telecom services.
  
• Telia's lack of substantial differentiation in value-added or digital services versus global tech giants limits its ability to lift ARPU or offset declining legacy revenues, which may continue to strain net margins and challenge long-term earnings growth despite recent cost optimization and portfolio simplification.

Valuation

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

• The analysts have a consensus price target of SEK46.75 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 SEK60.0, and the most bearish reporting a price target of just SEK30.7.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK86.3 billion, earnings will come to SEK10.5 billion, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 5.5%.
• Given the current share price of SEK46.5, the analyst price target of SEK46.75 is 0.5% 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.