Telia Q1'25: Strongest quarter of the year behind

Translation: Original published in Finnish on 4/25/2025 at 7:00 am EEST.

We raise our target price on Telia to SEK 34.0 (was SEK 32.0) to reflect the forecast changes. We reiterate our Reduce recommendation. Telia's Q1 report was overall positive and exceeded our expectations. However, Q1 looks like the strongest quarter of the year in terms of earnings growth. We expect the company to grow in line with guidance, which is a good level by historical standards. The valuation picture of the stock (2025e P/E 16x and EV/EBIT 15x) remains neutral given the already tight earnings growth expectations. 

Positive surprises through the Q1 profit and loss account

Telia's revenue in the first quarter increased by 3.5% to 20,035 MSEK, and excluding currency effects and M&A, revenue increased by 3.3%. Revenue exceeded both our and consensus forecasts. Comparable service revenue growth accelerated slightly to 1.8% (Q4: 0.6%), which is positive as it puts profit growth on a firmer footing. Adjusted EBITDA increased by 7% to 7,803 MSEK and beat our forecast, but landing in line with consensus expectations. The result was supported by a major cost-saving program implemented in Q4 last year. In addition, several cost lines (one-off costs, depreciation, financing costs) were exceptionally a positive surprise. Generally, Telia's earnings beats have been few and far between and we think it is also positive that the beat was achieved in a structural and sustainable way.

The benefits of a clearer structure and thus a lower risk level are beginning to be reaped

Over the past 10 years, Telia has more often disappointed than positively surprised in terms of results. However, at the same time, the structure has been simplified practically all the time and has moved in a direction where the operator business in the Nordic countries is at the center. This is also much easier to manage, and thus the risk of negative surprises is reduced. The structure will apparently continue to be simplified as a general direction. In terms of M&A, this means that the company is more of a net seller, so major acquisitions are unlikely to be seen in the coming years.

Strong profit growth in 2025 due to cost savings

In 2025, the company expects comparable service revenue to grow by 2% (below 2% in H1’25 and above in H2), comparable EBITDA to grow by at least 5% (lower in Q2-Q3 and higher in Q4), investments of less than 14 BNSEK and free cash flow of 7.5 BNSEK. In our view, this year's guidance is realistic and in line with our forecasts (revenue +2% and EBITDA +6%). Revenue growth is supported by the growth in service revenue, while profitability is driven by the substantial cost savings of 2.6 billion to be implemented in Q4 and the continuous annual cost savings of around 1 billion. In our view, it is now important for the company to continue to grow earnings and further improve cash flow in order to restore confidence in its sustainable business and reduce risk levels. Q1 was a good indication of this.

The valuation is cautiously attractive, but the rather high risk level of the earnings level still calls for caution

We forecast Telia's adjusted P/E and EV/EBIT multiples for 2025e to be 16x and 15x, respectively. The multiples are a good 10% below the Nordic peers and below the entire peer group. In our view, the valuation is even cautiously attractive in absolute and relative terms but considering the improved earnings level in the current year's forecasts (where Q1 was the best quarter), previous numerous disappointments, and the level of risk associated with earnings growth in the coming years, the overall picture is still neutral. The dividend yield (6%) partially limits the stock's downside, but it is not yet sustainable and thus does not act as a safety cushion. A positive view on Telia would require better evidence of sustained performance growth without further setbacks.