TLSNF - Telia: Maintain 'Buy' On This High Yielding Eventually-Rebounding Telco

2023-11-16 06:09:08 ET

Summary

• Telia is a high-yielding investment with a dividend yield of over 8% and well-covered dividends.
• The company's recent results show positive growth and operational stability, with reduced leverage and increased 5G coverage.
• Telia's current valuation is low, presenting a potential upside of 15-20% per year, and the company is considered a "BUY" at this time.

Dear readers/followers,

Telia (TLSNF) is a relatively large holding in my portfolio - over 3% at this time, and I've added to it as the company dropped. The company is typically speaking a fairly simple investment - Buy below X, sell above Y. However, for the time being, I see it likely that we'll stay below 30 SEK, which forms my opinion on how it should be handled. Telia has some near-term pricing challenges that will take some time to get away from.

However, the company is, on the other hand, a very attractive and high-yielding overall investment that's currently yielding over 8% at a current dividend of 2 SEK/year - and that dividend is, given the company's current income specifics, quite well-covered. It also means that my own position is actually down around 12% in total here, even including dividends.

Am I worried?

Not in the least. Telia is part of the backbone of the national infrastructure, and it's not going away - and I understand why the company, in this environment, is being valued like this, just as I understand why Verizon is currently at a 7%+ yield and Telenor is also trading at the 115-120 range. There has been a change in the risk-free rate and many of these operators are facing cost challenges.

That does not make Telia a long-term bad investment though. This is an updated article for Telia, and you can find my previous piece on the company here.

Let's see why you may want that 8%+ yield from one of Sweden's premiere Telco here.

Telia - Plenty to like, even in cross-wind

I've previously been very clear on how I see Telia in 2023 and for the next 1-2 years. It's the equivalent of a higher-yielding bond - over 8% is what you get here annually, and that yield is well covered. My approach for Telia has been simple for many years - simply "BUY" below a 30 SEK share price, and once it goes above 36-37, it's time to look at how long you want to keep it. This may be somewhat simplified, but it's a strategy that's worked very well for me.

We may be 2-4 years off from seeing that price again, but given where my cost basis currently is, this will result in a very nice payoff once these trends materialize.

While telecommunication companies haven't been the most popular sort of investment for some time here, there exist fundamental upsides in several of them.

The companies, including Telia, have been declining over the past few years due to increased interest rates, churn, and 5G rollout costs/CapEx. Now we also add inflation and cost challenges to that equation and the fact that some very simple and IG-rated debt instruments yield over 7-8%, which makes Telia not the greatest risk/reward play according to many investors.

The latest Telia results we have are the 3Q23 results. These results were actually superb.

What do I mean by this?

I mean that the company reported both service revenue growth, and close to double-digit adjusted EBITDA growth , and structural OFCF of over 3.5B SEK for a single quarter.

The company has also reduced its leverage to less than 2.6x, increased 5G coverage to 87% of the Swedish population, and increased its leadership in the Swedish spectrum, securing the leadership for the next 25 years. Telia also has a Finnish segment, and the network here is almost on par with the Swedish one. The company has also managed to sell its Danish operations, closed at the latest during 1Q24, another notch in the company's belt.

As a result of all of these achievements, Telia updated its 2023E targets. The company now expects an operational free cash flow for the structural part, of 7.5B SEK for the full year, with continued EBITDA growth at the low single digits, and growth in the top line as well. Capex excluding licenses and spectrum is expected at around 13.5B SEK.

Telia's revitalization is on track. The company is out of its risky, former emerging markets and scandalous fines and payments, and is showing consistent growth and operational stability , despite the company having in part a TV/media segment.

At this time, churn is relatively minimal, and the company is seeing positive net adds in both consumer and enterprise, with stable ARPU with a good product mix that offsets pricing pressure. The company's broadband segment is stable despite a shutdown of the copper segment, with new fiber and FWA compensating for the loss of the older networks, and revenue growth is strong here with 10% YoY increase. TV is actually on the increase, and Telia TV received awards this quarter around, with a growing subscriber base, and more importantly, growing ARPU in part at least due to further increases in pricing.

The trends in the company's other markets, including but not limited to Finland, Norway and the Baltics are also solid, with the company's now-relatively close growth markets (geographically speaking), being solid. in Estonia, the company is growing service revenue over 7% YoY, while delivering over 14% adjusted EBITDA growth, showing why this is a solid emerging market for the company - and one, I would say, without the risks of the previous markets that Telia has exited.

TV, despite awards and some good trends, remains in a problematic segment reflecting the overall advertising challenges experienced across the current macro. There's also streaming exhaustion, with direct OTT subs still being in a weak environment overall.

However, the positives clearly outweigh the negatives for this company. The company's CapEx is most definitely on the downtrend, with a peak in 4Q22, and the company is expected to decline even further. This is also reflected in continued positive trends in reduced net debt, and once again, is expected to improve even further in 4Q23 due to increased expected cash generation.

The sale of Telia Denmark is, by my calculations, expected to bring down this leverage by at least another 0.15-0.2x more, and that during 1Q24. That means that Telia is likely to be at an overall net debt/leverage of around 2.2x in 1Q24 , which makes this one of the lowest-leveraged major telcos in the entire region.

This company is set up to be a serious cash printing machine going forward, as it finds its hard work and investments have paid off. Take a look at some of the forecasts for the next few years.

That dividend is unlikely to change from the 2 SEK level, but at this level, that's over 8% yield - which means that you're getting 8% from Sweden's largest telco with some of the best infrastructure out there.

Telia has some of the most difficult periods out there behind it - including 2022 with negative GAAP and adjusted EPS.

But forward, we're going to see significant improvements year over year.

This is a BBB+ rated solid telco with over 94B SEK in market cap, and a total enterprise value of over 200B SEK.

Let's look at valuation.

Telia - A lot to like about valuation

As I have said earlier - despite some of the misgivings and the company performance in the last decade and more, I am confident about this company in the longer term. Telia happens to own some of the best infrastructure in the country, and I will argue that its position on the market is one of near-unassailability.

The company's ratios, nearly all of them, are at their 10-year lows. For Telia, this means they are very low because Telia hasn't been on the stock market for much longer than that. You know how it works in behavioral heuristics and some of the fallacies and biases here.

I argue that Telia's continued pattern declines and overall pressures are now deeply into the recency heuristic, wherein people give far too much weight to an event happening again - Telia going even lower if it recently has happened. In this case, I believe the underlying trends for the company are being disregarded, in combination with the less-than-cheap valuation we have here. To put it in layman's terms, people are undervaluing Telia because they're afraid there will be more scandals in the company's near term.

That's something I can confidently say I do not believe is the case.

At a 2 SEK EPS, which the company is expected to manage in 2024-2025E, the company is currently trading at below 13x P/E and yielding 8% with an upside to a 15-16x P/E of over 15-20% per year. Before you say that's unlikely, Telia is usually trading at a normalized 7-9x P/e of between 18-19x, which here would imply an overall upside of almost 28% per year.

The big reason for the company's massive decline was a negative earnings number last fiscal, which is now reversing. With 3Q23 we have sorted and clear positive results for this year, which I believe are going to grow even better going forward.

It's based on this set of improving results coupled with an eventual normalization that I believe investors in Telia at this point could see returns of upwards of 50-70% inclusive of dividends in less than 3 years.

The current average PT for the company comes to a range of 19 SEK to 40 SEK - in short, analysts have no idea what to do with this business. The average here is around 30 SEK, but only a year ago it was 40 SEK with a high of 50. As of right now, only 8 analysts are either at "BUY" or outperform. I consider this to be a result of the company's uncertain earnings history - but I expect once the positives start materializing, this will quickly change. Therefore, I'm very pleased to keep my position here and add to it whenever possible.

Telia is a great investment - and I give you my thesis for the November period of 2023. Much of my investments are still in telcos, and they remain very solid "cash cows", Telia is certainly high among these.

Thesis

• Telia, together with Telenor and Tele2, are Scandinavian-leading telecommunication businesses. Telia is by far the cheapest one of these at this time and is yielding over 7%+ with a covered yield that's already been confirmed for this year.
• I believe at this valuation, the company has a massive sort of upside, and should not be underestimated. I view this company as a "BUY" here.
• My price target for Telia is 35 SEK - specifically, I believe anything below 30, but especially below 25 SEK is a "STRONG" Buy, and anything above 37-38 is where you should start pruning your position.
• I can't buy more due to my exposure, but I would if I could.

Remember, I'm all about:

1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them ( italicized ).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

Telia fulfills every single one of my criteria, making it a clear "BUY" here.

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