Telenor Stock: Compelling Norwegian Telco Yielding 8%+ Into 2023

Dear readers/followers,

I’ve adopted Telenor (OTCPK:TELNF) (OTCPK:TELNY) for a few years at this level, and have written quite a lot of articles detailing my bullish stance for what I view as being one among Scandinavia’s higher telcos. Now, granted, the corporate is at present on a downward trajectory. However, I view this as unjustified, and I’m ready to point out you precisely why that’s.

Telenor is now, after 4Q22, yielding over 8% lined – it did very properly over the past 12 months, therefore the outperformance in the course of the day of reporting, and whereas some dangers stay, I do imagine that the valuation right here is compelling.

Here is why.

The bullish case for Telenor very a lot stays

Telenor has underperformed – little question about that. The motive for this underperformance is a few of the uncertainty in Asia, in addition to the development potential – or lack of it – in its legacy markets. Like most developed western markets, the Scandinavian market the place Telenor operates is actually an oligopoly, managed by 3-4 incumbent huge Telco companies that function absolutely the majority of the out there infrastructure.

While they will sometimes poach prospects from each other – I’ve switched backwards and forwards a number of instances, discovering precise development right here in legacy is hard – particularly when you take a look at inflation numbers and the telco challenges to truly increase costs. In nominal phrases, I paid extra for my cellular phone and web in 1998 than I do right now – although it is clearly structured very otherwise.

Still, some traders take what I’m saying right here and equate this to Telenor not having the ability to be worthwhile or develop.

That is incorrect.

As the corporate proved within the newest quarter of 4Q22, and as they’ve been proving, they’re completely able to rising revenues even in dwelling markets. In the final quarter, Telenor pushed income development in legacy Nordic areas by 5%. They additionally recorded document outcomes, coming in at a web earnings of 45B NOK in 2022.

This has additionally led to a document dividend of 9.4 NOK/share, cut up into two funds, which turns this firm’s yield to the coveted 8%+. And that yield, pricey readers, could be very a lot protected.

Now, the corporate additionally delivered some spectacular rising market development, after they closed the merger and created CelcomDigi.

As you may see, this can ship accretive development not solely in earnings however in dividends for fiscal 2024, which suggests we’ll see impacts in 2 years or so. Because of how Telenor operates, I’ll doubtless nonetheless maintain onto my 5%+ place within the firm when it comes to my portfolio.

What’s extra, the corporate is not simply pushing for achievement in Malaysia, however in Thailand as properly.

Where Telia (OTCPK:TLSNF) not solely failed with its rising market pushes however truly suffered due to them, Telenor after a very long time appears to have discovered working recipes not just for one however two main geographies that can ship worth to shareholders inside the subsequent few years and many years to return, as I see it. It may also greater than ten-fold the corporate’s buyer base in markets the place development is not simply “easy” to return by, it is prone to proceed for a while.

In legacy, issues are calmer however no much less thrilling. The firm bought 30% of its Norwegian fibre enterprise to a mixture of KKR and the Oslo Pension insurance coverage fund at an EV of 36BNOK, which accommodates round 560,000 properties, and complete proceeds of just about 11BNOK. The firm retains monetary and operational management, however this transaction will enable for additional worth creation with continued investments. It’s a transaction within the legacy that I like fairly a bit.

Numbers for the quarter, and the 12 months aren’t solely good – they’re truly superb – check out total Nordic development.

The firm additionally was capable of showcase EBITDA development in its Norwegian phase, in addition to a 1% natural EBITDA development for the complete 12 months of 2022. This is, given the price will increase, power prices, and inflation, fairly superb. The one factor I do not precisely like about Telenor is that when it comes to Capex/Sales %, the corporate is lagging behind a few of its southern European international locations, together with Orange (ORAN) and Deutsche Telekom (OTCQX:DTEGY). However, the corporate makes up for this with considerably extra secure legacy operations, which to me makes it high quality.

The share worth instability is one thing I did not count on to the diploma that we have been seeing, however the truth that the corporate climbed double digits on reporting day showcases how a lot negativity was baked into that valuation estimate.

This, by the best way, is just not saying that the corporate didn’t see an OpEx improve – however it was decrease than the 6-7% I modeled for, at 5% ex-energy and decrease power prices than anticipated.

Most importantly, natural free money move remained at surprisingly secure numbers. On a bunch stage, it is at 0.1% constructive, with essentially the most main detrimental impacts from Norway as a consequence of prices, and Bangladesh was up practically 2%. Not one of many firm’s working geographies is showcasing vital instability or volatility to a level that may fear me.

The firm additionally continues to function at very low leverage ratios – lower than 2.3x web debt/EBITDA.

Oh – the dividend is one a part of returning money – however Telenor is additionally utilizing this low valuation to purchase again shares, nearly 10B NOK price.

The in need of it’s this. I foresee it being a very worthwhile few years, being a Telenor shareholder. Part of my place was purchased at above 135 NOK, however half was purchased at beneath 95 NOK. I’m nonetheless down, however I count on the funding to change into worthwhile, even with out dividends (with dividends, I’m firmly within the black) by year-end this 12 months or subsequent on the newest.

At that time, will probably be too late to spend money on Telenor at an 8%+ yield, and a possible double-digit RoR.

The firm has additionally given us a 2023E outlook. For the time being, Telenor expects CapEx to remain at that 17% stage, however it ought to go down by billions in 2025E on the newest. Organic EBITDA development is anticipated to be a low-single-digit (mid at publish), with ongoing single-digit natural income development.

All are inside my goal and estimate vary, which suggests my valuation case for Telenor is as follows.

Telenor’s Continued Undervaluation

The reality is, since my final article, discovered right here, Telenor has firmly outperformed the market, greater than five-folding the outcomes we have seen. However, I’ve been constructive on Telenor for therefore lengthy, that this type of outperformance at this level actually would not lend me credit score right here – not less than not but.

As I’ve mentioned although, I truly count on this to proceed not only for now, however sooner or later as properly. The buybacks coupled with continued slight natural development, added onto by rising market earnings, will ultimately catapult Telenor to the highest of the Nordic telco meals chain. I do not thoughts saying that – I imagine Telenor has extra potential than Telia and Tele2 (OTCPK:TLTZF) each. Telia is a basic bond-type telco play. It’s a 6-10% annual RoR, with dividends. That’s high quality. Tele2 is similar, however with the added spice of extraordinary dividends, and it additionally owns one of many largest cable infrastructures within the nation.

Telenor although, that is the participant that may actually develop long-term, as I see it. Telenor is A-rated however has used its money to drive accretive M&As over the previous few years. Much of what the corporate might ship over the subsequent 5 years continues to be percolating – we’re simply now beginning to see the implications, as of this quarter, so you really want to bide your time right here. That is how I view it.

I count on my Telenor funding to double in the long run. The yield is now over 8% – and it is well-covered – although. That places it on par with Orange, which is superb to me, given what this firm truly delivers. S&P Global analysts have gone down of their targets from 160 NOK a few 12 months again, to the place they at present stand at 125 NOK. That’s a few 10% upside from right now’s stage. However, as I’ve mentioned earlier than, I view this to be fully too detrimental for what the corporate presents.

My earlier PT is 150 NOK/share. That’s the one I held in my final article. Because I see zero causes to shift from this goal right here, I’m not going to shift it. The value will increase had been already calculated in that concentrate on, however so had been the successes in M&As and the corporate’s rising market pushes.

I wish to as soon as once more name consideration to one among my Norwegian drum-beatings for an undervalued Scandinavian firm. Many of you took my stance, a few of you elected to disregard it.

The outcomes?

In the tip, I invested practically 4.5% of my complete portfolio into Hydro, which then ballooned to nearly 8% of my holdings earlier than I began trimming. Different sectors, however the identical logic, and the identical nation/geography. I don’t want my readers to overlook out on undervaluation alternatives, so even for those who get bored with my beating the drum right here, I’ll preserve doing it to hammer the purpose dwelling.

Telenor is an actual good potential “BUY” right here, and I’d like so that you can not less than check out it to see if it would suit your funding standards – as a result of it suits mine like a glove.

Thesis

My thesis for Telenor is as follows:

• I view Telenor as one of many most secure telcos in all of Europe, based mostly on its fundamentals and markets. Safer than Orange, and safer than Tele2/Telia. Perhaps Deutsche Telekom may be as protected, however lower than half the present yield – and Telenor additionally mixes this with development potential.
• Based on this security and this yield in addition to this upside, I’m marking this firm as a “BUY” and contemplating it with a PT of 150 NOK/share. I’m not altering my PT right here.
• I imagine the appropriate method to spend money on the enterprise is native shares solely, not ADRs. The native share trades on the Oslo Share trade underneath the image TEL, and on the time of writing trade fingers for about 110 NOK.

Remember, I’m all about :

1. Buying undervalued – even when that undervaluation is slight, and never mind-numbingly huge – corporations at a reduction, permitting them to normalize over time and harvesting capital positive aspects and dividends within the meantime.

2. If the corporate goes properly past normalization and goes into overvaluation, I harvest positive aspects and rotate my place into different undervalued shares, repeating #1.

3. If the corporate would not go into overvaluation, however hovers inside a good worth, or goes again right down to undervaluation, I purchase extra as time permits.

4. I reinvest proceeds from dividends, financial savings from work, or different money inflows as laid out in #1.

Here are my standards and the way the corporate fulfills them (italicized).

• This firm is total qualitative.
• This firm is essentially protected/conservative & well-run.
• This firm pays a well-covered dividend.
• This firm is at present low-cost.
• This firm has a sensible upside based mostly on earnings development or a number of enlargement/reversion.

The firm nonetheless fulfills each single one among my valuation standards – this one stays a “BUY”, and a extra enticing one now that the dividend is clarified.

Editor’s Note: This article discusses a number of securities that don’t trade on a serious U.S. trade. Please concentrate on the dangers related to these shares.