Eltel - Not improving quite that fast

Eltel’s long-term earnings growth continues, however we make big cuts to our estimates following the Q3 report as the pace doesn’t seem nearly as quick as we had estimated. Our TP is now SEK 17.0 (29.5) and new rating HOLD (BUY).

The Q3 report produced mostly negative surprises

Eltel Q3 revenue fell 14% y/y and was EUR 194m vs the EUR 224m/214m Evli/cons. estimates. The top line miss stemmed from all the reporting units and caused margin pressure, resulting in a EUR 4.0m EBIT vs the EUR 9.0m/8.3m Evli/cons. estimates. The 80bps y/y decline in operative EBITA margin was also due to challenges in the Polish High Voltage business and cost inflation as steel prices have doubled. The cost increases had a negative EUR 2m effect on Polish profitability. Low Danish customer volumes hit local profitability, while Norwegian EBITA margin remained good. Another positive was the narrowing of losses in Sweden, and Finland reached a strong result despite cost inflation (seen especially in Power while not in Communication).

Earnings growth continues, but not as quick as estimated

Eltel remains set for long-term earnings growth, however the gradient now seems to be much less steep than we had estimated before. We cut our Q4 EBITA estimate from EUR 8.3m to EUR 4.8m. We revise the following years’ EBITA estimates down by some EUR 7-8m. In our view Eltel is set to reach above 2% EBITA margins going forward, but we revise our FY ’22 estimate down to 2.6% from 3.3%. We expect soft development for Denmark until next year; we see the Norwegian situation a bit better as the local fiber market should bounce back. We expect Sweden to break even soon enough, while Finland should continue to perform strong (street lighting being one area of interest). There’s no fixed timeframe for the possible Polish exit and so any decision will likely have to wait until next year.

Improving performance seems to be fully valued for now

We cut our TP to SEK 17.0 (29.5) as earnings improvement continues to materialize at a slower pace than we had estimated prior to the Q3 report. Margin improvement potential should remain solid as Eltel’s margins are still considerably below those of peers. Multiples are lower than peers’ in terms of EV/EBITDA (7x on our FY ’22 estimate) and higher in terms of EV/EBIT (around 18x). Our rating is now HOLD (BUY).

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