Tele2 Earnings: Maintain Our Fair Value; Firm Increases Investments and Reports Flat EBITDAaL Growth

Shares of narrow-moat Tele2 TEL2 B are down by more than 10% at the time of the writing after the firm reported second-quarter results. We believe investors have two main concerns: the first is that Tele2 will not reach its EBITDA after leases guidance for 2023 as EBITDAaL was flat year over year compared with management’s guidance of low-single-digit growth. The second is management increasing its capital expenditure guidance by around 20% for the next two years to strengthen the company’s 5G position, followed by a reduction in 2025 and 2026. Management now expects a capital expenditure/sales ratio of 10% to 14% (or SEK 2.8 billion to SEK 3.9 billion) compared with SEK 2.8 billion to SEK 3.3 billion previously. After these changes there is less room for error by Tele2, so we are maintaining our SEK 100 fair value estimate as medium-term EBITDAaL ambitions for low-single-digit growth look achievable to us and Tele2 management deserves the benefit of the doubt given they have historically been good with guidance and capital allocation.

Despite 4% organic revenue growth, EBITDAaL remained flat due to wage inflation and the phasing of content costs, which were higher in the first half of the year. Sweden’s inflation rate remains well above the euro area, being 9.3% in June compared with 5.5% for the euro area, something that is weighing on Tele2′s results. However, Tele2 indicated that price increases are starting to be reflected in the financials, which will help EBITDAaL in the second half of the year. June, for example, already saw better financial performance, according to management. In our view, price increases, a potential moderation of inflation, and lower content costs should help EBITDAaL in the second half of the year. We model a 1.9% compounded annual growth rate in EBITDAaL until 2027 supported by low-single-digit growth in revenue and good cost controls by Tele2.