Telia Earnings: TV Division Again Obscures Good Performance in Telecom

In our view, Telia TELIA had a satisfactory performance in its telecom business this quarter, with 3.2% organic growth in service revenue and 4.7% growth in EBITDA. However, this was offset by poor performance in the TV business as companies cut advertising expenditures due to recessionary fears. The TV business wiped out most of the growth, turning 4.7% EBITDA growth in telecom to flat EBITDA for the group overall. Telia´s TV business has been a drag for a long time as linear TV is a market in structural decline with lumpy variations between quarters. We maintain our SEK 29 fair value estimate.

Nordic geographies all showed low-single-digit to mid-single-digit organic revenue growth rates supported by price increases and some customer gains. Like its peers, Telia has been executing price increases of up to 9% in most geographies to offset higher costs from energy and personnel expenses. In Sweden Telia´s service revenue grew about 2% organically to SEK 9 billion, the same growth rate reported by Tele2 a few days ago. Broadband performed particularly well, with the customer base growing slightly and price increases in fiber plans. In Finland and Norway, service revenue grew by 2.3% and 5.4% organically, supported by mobile and fixed-line markets, which in Norway translated into 14.3% EBITDA growth due to lower costs and an easy comparable figure. In Lithuania and Estonia, Telia´s highest growth markets, service revenue grew by 6.5% and 8.3% respectively with EBITDA growing at double-digit rates due to operating leverage.

Telia´s net debt/EBITDA ratio breached the 2.5 times upper range guided by management, although it is expected to decrease in the second half of the year. We believe Telia´s dividend is not maintainable organically and management will either have to increase its leverage targets or cut the dividend at some point.