A leading Nordic field service provider for critical power and communication networks
Eltel is likely to grow at high single-digit rates from here, but valuation already largely anticipates improving EBIT.
Growth and new orders, inflation still a major issue
Eltel’s Q3 revenue grew 7% y/y to EUR 207m vs the EUR 202m/201m Evli/cons. estimates. We find the top line beat was attributable to Norway, which grew 16%. Eltel has recently announced many new contracts, one-third of which are new business, and the EUR 406m orders will help EBIT to bottom out especially when they reflect higher costs. Inflation will, however, have a negative effect of more than EUR 10m this year. Q3 produced an EBIT of EUR 4.1m vs the EUR 3.2m/3.4m Evli/cons. estimates. The inflation challenge may already be easing a bit, but there are additional challenges such as employee turnover. Certain new projects may also come with a learning curve; e.g. Norwegian Q3 profitability was negatively impacted by the mix shift to more remote and smaller Communication projects.
Demand should support high single-digit growth rates
The Q3 report produced no big surprises in the sense that demand was known to be high, as highlighted by the many new contract announcements (further Power agreements have been announced after Q3). Customer investment levels are rebounding after the pandemic, but inflation is more widespread than previously estimated and its precise effect on 2-3 year-long frame contracts is hard to anticipate. Employee turnover is a particular problem in Sweden, but labor shortage issues extend to other countries as well. Profitability development hence remains highly uncertain for at least a couple of more quarters. Long-term demand and profitability drivers are in place like before for both Power and Connectivity. Eltel also announced its aim to capture 10% of the Finnish wind power market by 2025.
Valuation unchallenging from long-term margins view
Valuation isn’t very challenging as EBIT is bottoming out this year, while growth and inflation compensation are likely to drive margins for at least a couple of years. Growth should continue at high single-digit rates from Q4 on, yet we find the 11x EV/EBIT valuation, on our FY ’23 estimates, still neutral relative to peers. Eltel’s EBIT potential extends beyond that, and the 6x EV/EBIT on our FY ’24 estimates isn’t expensive but remains too far in the future. Our new TP is SEK 7.0 (9.0); we retain our HOLD rating.
Eltel’s Q3 results were somewhat above our and consensus estimates. Demand is now strong and it helps to compensate for high inflation, however Q3 is a seasonally favorable quarter and there are still uncertainties related to improvement pace, including labor shortage issues.
We see Eltel’s earnings are to decline this year as H1 cost challenges will continue to burden H2 results as well.
Nordics are coping with inflation, but H2 will still be soft
The EUR 208.6m Q2 revenue was soft vs the EUR 216.5m/215.2m Evli/cons. estimates. Finnish ICT strike hit top line in addition to a late spring, while Denmark suffered from low volumes as Eltel expected but more than we estimated. The other units’ top lines were above our estimates, but inflation was a lot bigger burden than we estimated: EBIT fell to EUR 0.4m vs the EUR 3.6m/3.2m Evli/cons. estimates. Finland performed better than we estimated despite inflation, which affected through its large Power business. Sweden improved the most in Q2, but the results beyond Finland and Sweden were clearly below our estimates. Inflation cover within frame agreements isn’t a major issue in Finland, Sweden and Denmark, whereas in Norway higher costs are yet to be addressed to a similar extent. Fuel and materials had ca. EUR 4m H1 impact and the level should be similar in H2.
We expect key markets to drive growth again next year
The inflation challenge is not that bad in the Nordics but remains a major issue in Poland, where it’s unclear how long beneficial outcomes might take to materialize. The possible divestiture of Poland has been on the agenda since last autumn, and a decision could be reached by the end of this year. Eltel’s long-term improvement path can still be seen as Finland and Sweden appear to continue firm on their own tracks. Meanwhile further progress should be expected from Norway and Denmark since both have recently signed large Communication agreements. We estimate Eltel to return to earnings growth again next year, however the weak H1 as well as the continued cost pressure over H2 imply FY ’22 will be a gap year in profitability terms.
Valuation appears fair in the light of margin potential
We shave our H2’22 EBITA estimates by EUR 5.3m, whereas our updated estimate for FY ’23 amounts to EUR 17.3m (prev. EUR 26.3m). Eltel is valued 5x EV/EBITDA and 14x EV/EBIT on our FY ’23 estimates, the former implying a discount to peers while the latter is a premium. We don’t consider valuation too challenging in the light of Eltel’s margin upside potential, however there’s still way to go before Eltel will be near its peers’ profitability. Our TP is now SEK 9 (10); we retain our HOLD rating.
Eltel’s Q2 top line was soft relative to estimates and profitability fell clearly below expectations as inflation hit results more than was expected.
Q1 profitability fell short of expectations and Eltel also removed guidance due to inflation. Long-term potential remains there, but we continue to view valuation fair.
Revenue in line, profitability fell particularly in Sweden
Eltel’s Q1 revenue was EUR 184m vs the EUR 185m/180m Evli/cons. estimates. Top line turned to growth in Q1, and there were no delays although some Polish projects may be affected going forward. Winter conditions and infections also had a negative effect on productivity, but fibre and 5G demand remained very strong in the Nordics. Power grid works in the Nordics are prospects. Operative EBITA was EUR -2.4m vs our EUR -0.2m estimate as inflation accelerated. Finnish and Norwegian profitability levels were like we expected, Denmark was a bit soft; the miss was mostly due to Sweden. Eltel removes its guidance for the year because of the inflation spike, however the company expects to receive compensation for higher costs already in Q2 in the Nordics, but Poland might take longer.
Potential remains, but uncertainty is high
Inflation is really hurting the Power business through fuel, steel, cable and concrete prices, and the war in Ukraine is also an issue as it might delay projects in Poland. Eltel works on the assumption inflation will persist for now and hence the company also pushed its long-term financial performance target date forward by two years. We cut our Q2 EBITA estimate to EUR 3.7m (prev. EUR 7.1m). We therefore estimate only marginal profitability improvement this year. We expect Eltel’s earnings improvement to continue next year as the company is likely to receive adequate compensation for higher costs. We also expect Sweden to be back to black later this year and note Eltel is implementing certain profitability investments in the country.
Valuation is overall fair relative to peers
Our EBITA estimate for the year is now EUR 15.1m vs EUR 22.2m before the report. We make basically no changes to our top line estimates and apply only a minor cut to our FY ’23 profitability estimates. Eltel is valued at a relatively high 18x EV/EBIT level on our FY ’22 estimates, but the level should decline relatively fast in the coming years as profitability lags most peers. The valuation is modest relative to long-term potential, but in our view this is fair. Our TP is now SEK 10 (15); we retain our HOLD rating.
Eltel’s Q1 top line was close to estimates, but the war and unforeseen inflation hit bottom line hard. Eltel may get compensation for the higher costs later during the year, but there is a risk the overall impact of inflation remains negative this year and hence Eltel also removes its guidance.
Eltel’s profitability continues to improve, but we find valuation still doesn’t leave that much upside.
Positives, negatives, and one-off gains
Eltel’s Q4 revenue, at EUR 226m, topped the EUR 206m/207m Evli/cons. estimates while EBITA came in ca. EUR 2m above estimates. Finland performed much according to our expectations while Sweden topped our estimates; Norway and Denmark were a bit soft. The EUR 2.5m positive one-off in Poland, due to a real estate sale, drove the Other business segment to an EBITA of EUR 1.7m, clearly above our estimates even when excluding the one-off. Eltel’s earnings were, however, much in line with our estimates when adjusted for the one-off. Eltel’s turnaround continues and the company guides increasing operative EBITA margin for FY ’22. Q1, as happens to be the nature of the business, will represent a slow start for the year.
We now estimate a positive rate of growth for the year
Eltel continues to make progress, but there remains much uncertainty with respect to the gradient. Diesel prices, salaries, materials as well as logistics costs are headwinds. Inflation isn’t a problem for the Communication business (more than 60% of revenue), yet it affects Power. We make relatively small estimate revisions, but we now expect Eltel to reach a positive 2% growth this year, whereas we previously expected a 2% decline. Our new FY ‘22 revenue estimate is EUR 829.6m (prev. EUR 774.0m). Our margin estimates are up by only 10bps for the year, but they rise by some EUR 2m in absolute terms due to the growth revision. We however expect Q1 EBITA to remain slightly in the red and see most of the profitability gains accruing over the summer. We believe Eltel is still going to focus on turnaround for a while and thus e.g. M&A may have to wait for a while, but should it occur Denmark and Sweden are perhaps the most potential countries.
Valuation continues to stand neutral
Valuation still doesn’t seem to offer clear upside considering the uncertainty around the improvement pace. We find the 6x EV/EBITDA and 15x EV/EBIT multiples, on our FY ’22 estimates, to be neutral relative to peers. Eltel’s margins remain modest compared to peers; quicker than expected improvement can drive upside, but we wouldn’t expect much more than EUR 22m EBITA at this point. Our TP is now SEK 15 (17); retain HOLD.
Eltel’s Q4 report delivered a clear positive surprise after a disappointing Q3 report. Sweden was able to break even, and positive development continues this year as Eltel guides increasing operative EBITA margin.
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).
Eltel’s Q3 results were burdened by lower top line, continued challenges in the Polish High Voltage business and cost inflation. Operative EBITA declined y/y while our and consensus estimates expected improvement. Eltel retains its FY ‘21 guidance and expects operative EBITA margin to improve y/y.
Eltel’s margins continued to gain in Q2 y/y. The report had no big surprises; Eltel makes progress according to plan. We make some downward revisions to our revenue estimates while we are a bit more positive on margins.
The 2.1% operative EBITA margin met our estimate
Q2 revenue declined by 14% y/y to EUR 210m, vs the EUR 228m/223m Evli/cons. estimates. Other business made up 9% of top line, while Communication still drove growth in Finland. Revenue declined in all other countries, and Swedish EBITA didn’t improve as the comparison period had a positive EUR 0.9m one-off item. The pandemic delayed Norwegian fiber activity, and together with tough winter produced some softness in local results. Meanwhile Denmark saw a positive EUR 0.8m one-off in profitability. Q2 EBIT landed at EUR 4.3m vs the EUR 4.4m/4.1m Evli/cons. estimates. Operative EBITA margin was 2.1% vs our 2.0% estimate. Q3 tends to be the most profitable quarter and we see the respective ‘21 margin at 4.1%, up 110bps y/y. We estimate FY ’21 EBITA margin improving by 130bps to 2.5%.
FI & NO drive short-term, SE & DK hold long-term promise
We moderate our Norwegian estimates a bit but still see the business similarly important for near-term results as Finland. Denmark is for now the smallest of the four but already achieves good margins and probably has the best long-term growth prospects. In our view traffic lighting presents a solid source of business for all four (Finnish street lighting in particular). Finland, Norway and Denmark also offer fiber opportunities, while in Sweden that market is more challenging. There’s scope for M&A, but we believe it probably takes many quarters before anything materializes. We expect Sweden to weigh figures at least in Q3. Eltel is however making progress there, and we see group-level growth turning positive in Q4 thanks to Finnish and Norwegian strength. We estimate Eltel’s Q3 growth to remain negative.
Current valuation leaves solid upside potential
Eltel is valued ca. 7.5x EV/EBITDA and 16x EV/EBIT on our FY ’22 estimates. We see the respective FY ‘23 multiples at 6.5x and 13x. These are somewhat neutral levels compared to peers, but we continue to view valuation attractive as Eltel advances towards its long-term 5% EBITA margin target (we estimate 3.9% for FY ’23). We retain our SEK 29.5 TP and BUY rating.
Eltel’s Q2 produced a sixth consecutive annual improvement in operative EBITA and the result was close to estimates. Eltel maintains its previous guidance and expects similar development for the rest of the year.
Eltel’s Q1 results fell short of our expectations. Q1 is typically a weaker quarter due to seasonality and we expect net sales and profitability to increase towards the end of the year. We retain our BUY-rating but adjust TP to SEK 29.5 (30).
Profitability improved y/y despite the decline in net sales
Eltel reported a Q1 result that was below our expectations. Net sales decreased by 23.1% to EUR 182m (Evli EUR 209.9m), while operative EBITA improved y/y from EUR -2.1m to EUR -0.7m (Evli EUR 1.0m). Net sales continued to decline due to the divestments made last year (EUR -15m), lower activity and postponements among customers as a result of COVID-19 and harsh winter conditions. Q1 was good in Finland (+3.2%), while last year’s loss of a major agreement affected the volumes in Sweden and the ramp-up phase of the Telenor frame agreement was reflected in lower sales in Norway. Good resource and production planning, increased efficiency and better project management supported profitability, while the effect of divestments was EUR -0.9m.
Sales and EBITA are expected to grow towards the end of the year
Eltel’s business is subject to seasonality and Q1 is typically a weaker quarter. Net sales and profitability are expected to increase towards the end of the year and according to management, the order backlog looks good, especially in Finland and Norway. Based on the report, we have cut our net sales estimate for 2021E from EUR 916.8m to EUR 890.6m. We see the targeted growth rate of 2-4% in the Nordics achievable from 2022 onwards. In 2022-23E, we forecast net sales to grow by 1.7% and 2.0%. Currently, the focus is on profitability and Eltel has managed to increase its operative EBITA (y/y) for five consecutive quarters. We expect Eltel to continue its efforts to improve operational efficiency and in line with the guidance, we forecast operative EBITA margin to grow from 1.2% in 2020 to 2.4% (prev. 2.6%) in 2021E.
BUY with a target price of SEK 29.5 (30)
Despite lower-than-expected Q1 results, there have been no changes in the big picture. Eltel has continued its transformation journey with a focus on improving operational efficiency, profitability, financial position, and restructuring of non-performing businesses, which will be negatively reflected in this year’s sales. On our updated estimates for 2022-23E, Eltel is trading at EV/EBITDA of 7.9x and 7.0x, which translate into discount of 4-10% to our peer group median. On our revised estimates, we adjust our target price to SEK 29.5 (30) and retain our BUY-rating, which still values Eltel slightly below peers, reflecting Eltel’s lower profitability profile and as we look for more signs of further transformation progress.
Eltel’s Q1 results were below our expectations. Net sales amounted to EUR 182m (Evli 209.9m). Operative EBITA improved y/y to EUR -0.7m (EUR -2.1m in Q1/20) but was also below our expectations. (Evli EUR 1.0m)
Eltel has signed an agreement to divest its German High Voltage business to ENACO, a German service provider in the energy sector. Eltel classified its German High Voltage business as assets held for sale at the end of 2020 and the revaluation had EUR -5.7 million impact on Group EBIT in Q4/2020. The transaction is estimated to have negative cash flow effect of EUR 3.8 million. Eltel will as part of the divestment engage ENACO as a subcontractor for the completion of certain projects, which are expected to be completed during 2021 and 2022. The divestment is subject to customary approvals, and the transaction is expected to close during Q2/2021.
The divestment is in line with Eltel’s strategy and strengthens Eltel’s focus on the Nordic countries in which it has a market-leading position and the business model is more stable and repetitive. In 2020, Eltel’s German High Voltage business had about 75 employees and net sales of about EUR 10 million. After the divestments of the High Voltage and Communication business (in Q2/2020), Eltel has only the Smart Grids business left in Germany, which accounted for a smaller share of German net sales in 2020.
The divestment is relatively small and therefore has no effect on our current forecasts. In our estimates, we have already forecast the net sales of other business to decrease by EUR 26.9 million and we expect the share of other business to be ~10% of group net sales in 2021E. We maintain our TP of SEK 30 with BUY.
We initiate coverage of Eltel with BUY rating and a TP of SEK 30. We see that Eltel has the potential to succeed in its turnaround and, as such, we expect Eltel’s profitability to improve in the coming years and net sales to turn to growth in H2/2021. In our view, the margin improvement potential is not fully reflected in the current share price.
Eltel is in the midst of its turnaround journey
Eltel is the leading Nordic field service provider for critical power and communication networks. Eltel’s development since the IPO in 2015 did not meet expectations, and following a strategic review in 2017, Eltel has focused on its core businesses, Power and Communication in the Nordics, and the company is currently in the midst of a turnaround journey. The focus is on improving profitability, restructuring non-performing businesses, and strengthening its financial position, with first signs of operational improvement already visible.
We expect the recovery in margins to continue
In 2021E, we expect that net sales will decrease by 2.3% to EUR 916.8 million due to the focus on improving profitability and restructuring non-performing businesses. We expect net sales to turn to growth in H2/2021 and we see the targeted growth rate of 2-4% in the Nordics achievable from 2022 onwards. In 2022-23E, we forecast net sales to grow by 1.6% and 1.9% driven by growing 5G demand in the Nordics, as well as new frame agreements and contract expansions. Eltel has continued to take measures to improve operational efficiency and its exposure to risky and unprofitable projects has reduced over the past couple of years. In line with the guidance, we forecast operative EBITA margin to grow from 1.2% in 2020 to 2.6% in 2021E. Despite the right actions, we are more cautious in our profitability estimates compared to Eltel’s 5% EBITA margin target by 2023 and expect operative EBITA margins to be 3.3% and 3.8% in 2022-23E.
BUY with a target price of SEK 30
Eltel is currently moving in the right direction thanks to a healthier balance sheet, better quality of the order book with a focus on stable Nordic countries and a reduced risk-level of projects. On our estimates for 2022-23E, Eltel is trading at EV/EBITDA of 7.7x and 7.0x, which translate into discount of 11-14% to our peer group median. In our view, Eltel has potential to improve its profitability and the margin improvement potential is not fully reflected in the current share price. We initiate coverage of Eltel with a BUY-rating and a TP of SEK 30. Our TP values Eltel at EV/EBITDA of 8.3x and 7.6x for 2022-23E, which are still slightly (~7%) discount compared to our peer group, reflecting Eltel’s lower profitability profile and as we look for more signs of further transformation progress.
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Group EBITA margin of 5%. Annual growth of 2-4% in the Nordics from 2022 onwards. Net debt/EBITDA ratio of 1.5-2.5x.
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