Telia – Why I Just Added Another 0.5% To My Portfolio (TLSNY)

Dear readers/followers,

Telia has not been an easy stock to own over the past few years. I overestimated what sort of timeframe the company would recover, and the addition or inclusion of content-oriented portfolio assets like TV4 in the business has diluted the value and made the recovery and upside somewhat more unclear in terms of timing.

I’ve been covering Telia for a long time – and you can find my last article here. You might think that after a Q1 crash, I would not be keen on taking on more of the company in a portfolio that already has a relatively fair weight towards the telco sector – but you would be wrong.

I consider good telcos, good utilities, and good consumer goods businesses, to have one of the more interesting value proposals in today’s market. The combination of high-interest rates and low growth rates for telcos has pushed these businesses into a position where, once the interest rates revert, only see one possible, ultimate outcome for these investments – positive returns.

That is why despite everything that’s going on in the market today, I continue to weigh businesses like Telia (OTCPK:TLSNY), Tele2 (OTCPK:TLTZF), and Telenor (OTCQX:TELNY) very heavily.

In this article, I’ll deconstruct Q1 and show you why despite everything, I am actually quite positive about the company here.

Telia 1Q24 – the company has quite a bit of attraction

Telia fell over 5% during the day of the 1Q report. This was, honestly, quite a surprise to me – and it seems that it surprised other players on the market as well. it was a surprise because Telia offered quite solid operational momentum, with top-line growth in Telco, and TV and Media performance at a high overall level.

What do I mean?

I mean that mobile growth was 2.6%, fixed 3.1%, consumer growth was 3.8% (neutral enterprise/B2B trends), and a 2.1% EBITDA growth despite ongoing non-recurring cost items.

EBITDA from continuing operations was also up – almost 5%, and the losses in TV and Media were lower than before. OFCF was 400M SEK, and this is despite a 400M SEK pension refund, so it would be inching to OFCF of 1B SEK per quarter if that wasn’t the case.

Danish proceeds that I spoke about in my last article that Telia was to receive, reduced the company’s overall leverage even further. Telia is now leveraged at below 2.5x in 1Q, with divestment now finished.

The company will hold a capital market update in September of this year to clarify more where it is going from here.

Again, trends, as I see them, were positive.

What you see there is Sweden alone. The company’s core segment continues to throw off recurring cash and continues to provide extremely stable revenue growth, albeit a small one – though not smaller than any of the other telcos, despite being discounted more.

What KPIs are relevant, are solid? ARPU/Subs were stable with slight growth, broadband again, stable with slight growth, and TV subs were actually up 6% YoY, with ARPU up 17%, though this was mostly based off growth, not volume.

The company is also active in Norway and Finland, and these segments echoed the positivity of Sweden. The company’s Baltic operations in Estonia and Lithuania also saw continued growth – not a single company segment in telco operations here performed poorly or saw declines.

So what is the problem here with Telia?

As I’ve said before, I don’t like companies that mix telco operations with content operations. I think it’s a very poor mix, from a strategic point of view. The CapEx/Investment cycles and the way the assets are depreciated and “used” are just incompatible. But Telia, unfortunately, was the Swedish/Scandinavian Telco that decided to ignore this (unlike Tele2 and Telenor) and go straight into buying TV4 and content for over 10B SEK.

Well, now rumors are that they’re looking to divest them for about half that in less than 5 years after the fact. It proves my point, and proves, to my mind, that these operations are not compatible with one another. I believe we’ve seen the same in other parts of the world. That’s why I discount Telia more heavily than I do its peers, and it’s why I prefer Telcos that let others handle the “content game”.

I think Telcos should be broadband and mobile services and infrastructure/towers, that’s pretty much it – both for B2C and B2B – maybe also segments like cybersecurity and associated services to take advantage of the vast library of users and customers that they have, both on the private and the corporate side.

We can see the impact of continued poor advertising revenues and other items on Telia’s quarterly P&Ls.

I should also make it clear that I don’t much care about “growing subscriber bases” in this context. As you can see, this is in no way a guarantee when it comes to ARPU, EBITDA, or net income – it’s negative, and it continues to be negative. I don’t see it recovering anytime soon, either. Advertising continues to be, for lack of a better term, in the “toilet” here.

If I come off as extremely negative for these operations, it’s because I am. I have been since the start, and it’s the main reason I’ve discounted the company.

The proof is in the pudding. If you follow the news, there are clear rumors and even indicators that Telia is right now negotiating a sale of Tv4, with a suggested price tag of 5B SEK. Potential buyers that have been mentioned are advertising and publishing giants like Schibsted, Bonniers, and Egmont – any of which would give TV4 a more logical “home” than Telia.

Coincidentally, none of them are companies that I own or invest in – because I do not want to invest in digital content creation.

The fact that Telia paid over 10B SEK for TV4 is the last and hopefully final mistake in a long, long line of management decisions that have held Telia back for years. And no, I do not mince words here. Management, under several CEOs, has in my opinion, and the clear opinion of the market if you look at share prices, failed to extract the proper value from the company’s operations. The rationale at the time was that Telia would be able to break into content and monetize the advertising revenue from the various content outlets, such as TV4 and other streaming possibilities, far better than it has been able to.

Hopefully, these mistakes are now over.

After the company left its controversial non-Scandinavian scandal geographies and sold things like TurkCell, Telia is left in a good position, despite everything said just now. It has one of the best infrastructures for Telco operations in all of Sweden – I would argue, alongside many others, that it’s “the” best.

So there’s a lot of value in Telia – if they can finally put some reins and a bit on management and the board, and know what they should and shouldn’t do as a Telco company. Again, these are harsh words, but I believe they are justified. I do not believe you needed to be a genius to see that their content bet on TV was on the bad side in terms of risk/reward. It was presented as a “dream”, combining stable cash flows from legacy infrastructure with the growth potential in content. However, it turned into an absolute nightmare, and a drain on one of the best Telcos in Sweden. Understanding management and the context here is tricky because none of the other telcos in Scandinavia went this route, and despite the environment at the time, the potential risk in an increased rate environment as clear to at least me – but also other analysts. One could argue Tele2 did a bit with Comhem, but this was an entirely different deal because it included significant infrastructure (cable internet/TV).

And it’s why I want to show you the valuation upside post-this.

Telia Valuation – Attractive at this time

So, my last article PT was 35 SEK for Telia. I am not shifting this as of this time, and I say that the company may even go well beyond this, once things turn out better – as I believe they will.

When?

That’s something we’ll see.

Extracting value from what is left in Telia here will take time. The unfortunate truth is that the adjusted earnings as of this time don’t exactly cover the dividend – however, the company has ample room in leverage, and with a clear upside (as I see it) going forward, this should be a non-issue.

Put simply, I do not believe Telia will cut the dividend from today’s level now, as they haven’t before when things were far worse.

For 2024, the company is expected to recover – and for every year beyond that as well, until we end up close to 2 SEK/share in 2026.

Because of the strength of the company’s infrastructure, and the incumbent state of its operation – there is no player larger or better in terms of what they own in Sweden in terms of coverage, I would value a “working” Telia at quite a high multiple – at least 15-16x P/E, which even at today’s levels turns this into a 15% annualized upside. When things work out, I believe an 18-19x P/E is entirely possible, and that is where I show you a 19% annualized upside with dividends on the 10-year normalized basis at 18.5x.

To be very clear with you, this is a mix of an income play with some reversal potential. It’s not the “best” investment of any sector out there, but for someone looking for continuous income with a potential for growth, Telia offers this and safety. The company is BBB+ rated and has the “backing” of the entire Swedish telecommunication infrastructure. While 1-2 years might see a downturn, as we’ve seen before, the long-term potential for this company is a positive one, as I see it.

The current average PT for the company remains at a range of 21 SEK to 37 SEK for the longer term – in short, analysts still have no idea what to do with this business and where it’s going to go. It’s an understandable sentiment, given what has happened to the company in the past few years.

The average here is around 29 SEK, down one SEK from my last article on Telia, but only 2 years 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. As of this article and quarterly report, I believe Telia to be in a prime position for adding, with a potential near-8%+ yield at 2 SEK/year in dividends, which is where I believe the company will end up.

Oh, as a side note, several of the company’s management team also bought shares when the company dropped – no huge positions, but a couple of hundred thousand SEK worth, which is a bit of confidence here.

When it comes to Risks for Telia that could impact the thesis here, we find the unwinding of TV4 as leading that list of risk potentials. The fact that the deal was done during a structural decline, yet still paid a high multiple tells us something about management’s deal-making skills at the time, and it’s not positive. Its legacy as a capital allocator has been dismal for the last 2 decades. It has a tradition of overextending its operations, and the balance sheet in its current state still suffers from these decisions. However, as you can read, these are primary backward-facing risks and historical ones. Going forward, I outweigh the positives, with strength in legacy Sweden and Norway, and Telia’s current management has left most of the complex Eurasian legacy behind, focusing on legacy and the Baltics, which I believe to be completely sustainable.

For all these reasons, my thesis for the company is as follows.

Thesis

• Telia, together with Telenor and Tele2, are the 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 recently added 0.5% to my portfolio when the company dropped below 25 SEK briefly.

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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.