Eltel Q3'25: The margin story remains intact

While Eltel’s Q3 revenue came in below our estimate, the margins aligned well with our expectations. We view the in-line Q3 margin, despite lower revenue, as a sign of higher resilience and further proof that Eltel’s operational and commercial efficiency measures are delivering results. We also feel the continued good progress in new business areas (24% of total contracted value in Q3) supports continued profitability improvement going forward. In a turnaround case like Eltel, the margin progression remains central to our investment thesis, as it is the main driver of sustainable value creation. We feel the company has taken clear and consistent steps in the right direction and is now better positioned to sustain and continue to improve its margins. That said, in light of the Q3 report, we have revised our revenue estimates down but kept margins largely intact. After the post-earnings share price decline, we believe the current valuation offers a good risk-adjusted return potential over the next 12 months. We therefore reiterate our Accumulate recommendation and raise our target price to SEK 9.9 (was SEK 9.7).

Softer Q3 revenue than expected

Group revenue decreased by 1% (y/y)  to 208 MEUR, below our expected 222 MEUR. On the profitability side, adjusted EBITA continued to improve, amounting to 9.1 MEUR (Q3’24: 8.3 MEUR) and a 4.3% margin. While the absolute figure was below our estimated 9.6 MEUR, the margin matched our expectations.  Considering the lower-than-expected volumes in Q3, we think the in-line margin is particularly encouraging and provides further evidence of a more resilient, efficient, and commercially disciplined business. At a country-unit level, top-line growth was mixed across geographies, but overall weaker than we had expected. While some areas show nice growth, they have not offset other areas that face declining volumes. For example, in Finland, the Power segment grew 33% year-on-year, driven by e.g. Solar PV, while the Communication segment declined by 27% due to lower volumes in the fiber-to-the-home (FTTH) business. In Norway, the telecommunication market remained soft and revenue declined by -12% (Inderes est. -3%). However, despite this, profitability in Norway exceeded our estimates (EBITA-%: 1.7% vs 0.8%), and thus, reached black figures after more than two years of negative margins.

We lower our revenue estimates but keep margins intact

The Q3 report and management’s commentary suggest no major changes to the broader outlook, with demand remaining mixed across geographies and service lines. Outside Norway, demand appears at least decent. However, following the weaker-than-expected revenue in Q3, we have lowered our estimates for the Group. At Group level, our revenue estimates decreased by 3-4% for 2025-2027. While our adjusted EBITA estimate for 2025e was reduced by ~3%, the impact on our medium to longer term estimates was less pronounced as we kept our EBITA margin estimates largely unchanged.

Share pullback keeps risk/reward attractive

Based on our updated estimates changes, we still consider the overall earnings-based valuation for the current year as stretched (EV/EBITDA 6x, EV/EBIT 13x, P/E 51x), relative to our acceptable valuation range (EV/EBITDA 5x-7x, EV/EBIT 8x-11x, P/E 9x-13x). However, we expect valuation multiples to fall to more neutral and even attractive levels during 2026-2027 (EV/EBITDA: 4x, EV/EBIT: 9-8x, P/E: 12-9x), supported by strong earnings growth. With Eltel being, in our view, structurally better positioned today than before to maintain improved margins, supported by its ninth consecutive quarter of year-on-year profitability improvements, we feel that we can rely more on forward-looking valuation. Our DCF model also supports our view on the valuation, indicating a value per share of SEK 9.9 (was SEK 10.0). Overall, we think the risk-adjusted expected return is good at the current share price level.