Telia Q3'24: We still await evidence of efficiency measures

Translation: Original published in Finnish on 10/25/2024 at 8:55 am EEST.

We reiterate our SEK 32 target price and Reduce recommendation for Telia’s share. Operational figures were in line, with other earnings lines beating forecasts in Q3. As a result, we have kept our operating forecasts broadly unchanged but lowered our expectations for financial expenses. We expect the company to grow at or slightly below the guidance for this year and the next. The slightly decelerating revenue trend and past disappointments on the effectiveness of efficiency measures keep us somewhat cautious. However, the valuation picture for the stock (2024-25e P/E 18x and 15x) remains neutral. 

Operational figures were in line, with other earnings lines beating forecasts in Q3

Telia reported Q3 revenue down 1% at 21,749 MSEK. Revenue was slightly below our and the market's expectations. Comparable growth in service revenues slowed down and was +1.2% (Q2'24: 3.3%). Overall, therefore, the revenue growth trend has weakened once again after another better quarter, and the company expects a slightly reduced growth trend for the rest of the year and for H1'25. The adjusted EBITDA was at the level of the comparison period at 8,475 MSEK and slightly above our and the market’s expectations. There were record low non-recurring expenses, practically none, and the reported result was therefore well above our expectations. Earnings development was slowed down by the decline in revenue but supported by efficiency measures. On the lower lines, financial expenses were lower than expected.

Telia revised its earnings guidance upwards for 2024 and expects good earnings growth in 2025

Telia reiterated its service revenue guidance and expects it to grow by around 1-3% in 2024. The company also revised its EBITDA guidance upwards and expects it to grow by around 5% in 2024 (previously ~1-6%). In 2025, the company expects comparable service revenue growth of 2%, comparable EBITDA growth of at least 5% (H2'25 below 2% and above 4%), capital expenditure below 14 BNSEK and free cash flow of approximately 8 BNSEK. We believe that the guidance for this year and the next is realistic and in line with our forecasts. Revenue growth will be supported by growth in service revenue and TV&Media, while profitability will be driven by substantial cost savings of 2.6 BNSEK in Q4. 

Big picture of strategy unchanged and financial targets largely very realistic

In September, Telia held an investor day where it announced its refined strategy, new financial targets and how the targets will be achieved. As expected, there were no changes to the big picture of the strategy, only refinements to the priorities. The new targets are largely very realistic and within our forecasts, but the cash flow target is more ambitious.

Next year's value already priced in, especially given the risk to earnings growth

Telia's adjusted P/E and EV/EBIT multiples for 2024 are respectively 18x and 17x, just over 10% below Nordic peers and >10% above the peer group as a whole. The corresponding multiples for 2025 are 15x, or 14% below Nordic peers. Valuation is strained on 2024e multiples and already neutral on 2025e multiples. However, the 2025 multiples already reflect a much improved performance in our forecasts, although this still carries significant risk. The dividend yield (6%) partially limits the stock's downside, but it is not sustainable and thus does not act as a safety cushion. A positive view on Telia would require better consistent evidence of earnings growth without new headwinds.