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Dear readers/followers,
You may recall that I’ve been a very vocal investor in telecommunications. The reason for these investments is a very good overall yield and very solid fundamentals. These two factors will usually, over time, result in a premium during times of low-interest rates and give you a potential for market-beating rates of return, if you have the presence of mind to actually harvest those profits at the right time.
Telenor (OTCQX:TELNF)(OTCQX:TELNY) has been a core holding for me at this time for many years – and my cost basis has gone down thanks to purchases to around 102 NOK/share. This means that as things currently stand, I have a yield of over 8% on this stock.
A yield of 8% is not necessarily unusual – but I will argue that it is unusual with this quality of stock.
In this article, I will make a case for you why Telenor marks a great investment for a diversified and value-conscious investor and his/her portfolio. I’ve written about this company before, and you can find my most recent article here.
Let’s look at what qualities make Telenor stand out from the competition and from its peers.
Telenor has plenty of potential in a high-yield package
When it comes to Telcos, I would say there are a number of things that I like to see, and also some things I don’t like to see.
First of all, I don’t overly like telcos that have content creation. This is not a dealbreaker by any stretch of the imagination, but I prefer companies that keep their fingers out of the content creation game. Given the typical structure of a telecommunications company, the investment CapEx associated with content curation or syndication can impact operations negatively.
I like Telcos that keep their focus sharp. I generally prefer them to stick to mobile, fiber, spectrum, and towers – consumer and commercial/enterprise, with a potential foray into cybersecurity. Tele2 (OTCPK:TLTZF) is an exception to this, with its ComHem portion, but most others who have ventured into the content or other parts of the related industry have ended up, as I see it, failing relatively heavily.
Telenor, as a business, is the incumbent Norwegian Telco with operations in the Nordics and in Asia. It’s a mature business with growth potential and a high reliance on mobile operations but with superb FCF trends and very solid dividend yields. It’s also Norwegian, which means the state has involvement. Also, Telenor, unlike many of the other European incumbents was one of the first Telcos to invest in emerging market areas – and unlike the other companies, has actually managed to do this successfully. Unlike Telia, there haven’t been business-destroying corruption or other scandals. (Source: Telenor IR)
Telenor combines the strength of a native nation segment with a massive share in both mobile and broadband – and this is despite actually being at the highest price point, disproving some of the customer-choosing-the-cheapest option hypotheses.
I am personally a user of Telenor for my enterprise communication, and while not being the absolutely strongest in Swedish coverage, it’s right up there.
So, Telenor essentially has incumbent stability in Scandinavia, with growth from its emerging Asian operations – which grants both growth, but also means that there is a decent amount of operational instability/volatility. The main advantage, as I see it, is that these emerging markets are at completely different maturation points, which means that the company has the ability to really grow profits and operations here. (Source: Telenor IR)
Its recent activity includes, among other things, merging its Thai DTAC business with True as well as the Malaysian business arm with the incumbent Axiata – growth through M&A. These resulting merged businesses have an extremely high market share in their respective markets, and as with any business operation and the logic, results in massive cost synergies that will enable earnings growth and potential dividend bumps going forward.
There is a question of how much Telenor should focus on those Asian markets, instead of focusing on the European core. Some analysts would like to see a return of capital focus on the core operations and divestment of some Asian operations, monetizing those assets as it were. I’m more of the mind that the company should balance this very carefully, as this gives Telenor a definite edge going forward. (Source: Telenor IR)
The latest results we have are the full-year ones, and these were positive.
We, above everything else, can record incumbent MSR growth through the entire year despite macro pressures and issues. The company generated FCF in excess of 5.5B Norwegian crowns in a single quarter and over 15B for the entirety of the year. As mentioned above, the company has also made major movements towards its long-term goals with some very strategic mergers.
Telenor IR (Telenor IR)
The company is targeting its Nordic transformation, boosting share in cloud-based IT applications, doubling network loads, increasing shared services, improving the B2B offering, and working with the company’s use of working capital – it’s in fact recently announced a program with significant NWC improvement potential is already ongoing (Source: Telenor IR).
The growth will go to supporting its cash flows in the Asian market, which has 3 main nations left after the divestment of the Pakistani arm of Telenor. This includes Bangladesh, with GrameenPhone (#1 market position), Malaysia with Celcomdigi (#1 Market position), and Thailand with True (#1 market position).
So you can see why, regardless of the limited growth potential of incumbent European markets, I am very positive in terms of the outlook for Telenor in the next few years. That is why over 3% of my portfolio is in Telenor, both private and the commercial side.
With 4% top-line service growth, 2.8% EBITDA growth, and a sub-16% CapEx/Sales ratio, this company is among the best in the industry.
Telenor IR (Telenor IR)
Yes, there is an increase in operating expenditures, related here to Asia, but the company is addressing this with cost cuts where it can find them. Telenor is also growing as expected in more or less every single segment, with strong overall EBITDA growth. The P&Ls for this year were characteristically impaired by M&A-related items of almost 9B NOK as well as a JV. (Source: Telenor IR)
However, on the fundamental level, the company’s leverage remains firmly within the target corridor of 1.8x-2.3x at 2.2x. It’s been between 2.1x-2.2x for the past few quarters, with a small variance in 2Q23. However, other than that, this company is as stable as they come.
That is also why the dividend is not just metastable – it’s stable and growing.
Telenor IR (Telenor IR)
At 8% yield, and this being safe, this is one of the best A-rated 8% yields out there, as I see it. Again, this company is A-rated by S&P Global, with a market cap of over 172B NOK, and the expectation after a drop in earnings this year, with no expected drop in dividend during next year (Source: FactSet), is growth.
Let’s look at the risks and upsides here.
Risks & Upside with Telenor
The primary risks I see are obviously related to Asia. This is not just due to political or regulatory instability, but also currency fluctuations, including FX depreciation. An example of this is the 2021 impairment of the entire business arm in Myanmar due to a military coup. This is the risk of doing business in nations like this, and also one of the reasons the company left Pakistan. I would say the upsides outweigh this, but it’s nonetheless worth consideration here.
Secondly, increased market consolidation will encourage regulators to create an environment of more competition, and this is obviously in detriment to established players like Telenor.
However, positives are much more important here, as I see it. The geographic incumbent nation of Norway and Scandinavia as a whole provides a fundamental steady FCF, allowing Telenor to make these higher-risk plays at comparatively lower risk. These recent synergies in Asia will, as I see it, pay off eventually, and this makes Telenor, in my view, the “best” of all the three Scandinavian telcos to invest in.
That’s also why my position here is the largest.
Let’s look at valuation.
Valuation for Telenor – It’s quite compelling even at 120 NOK
First off, my PT for this company was and has been, 150 NOK here for some time. I’m not lowering this as of this article either. The company is worth this PT as I see it – fundamentals, yield, and eventual upside.
But at 122 NOK, the company can no longer be considered “cheap”. So you’re buying a well-priced telco, but not a supremely “cheap” one.
Still, there’s something to be said for the upside that you can get from Telenor by investing at this particular point in time.
What upside do we have?
European telcos tend to trade at a more premium level than their international counterparts. Telenor proves this with a 20-year average of around 17x P/E. Even in the case of a relatively flat development, you’d still annualize double digits here – and that’s with that 8% yield, and the potential for high valuation when the company reverts.
There’s also the question of whether the company really will drop down as far as analysts currently expect for this year. It’s possible, yes – but analyst accuracy is not all that strong here in the short term – and most analysts have adjusted their short-term and longer-term targets for Telenor upwards during the last few months (Source: FactSet), where the current 2026E EPS targets are back above 9 NOK/share here.
The company’s space to grow that dividend is shrinking – at least insofar as the company may need to monetize or otherwise add to those earnings to grow it further. But the thing is, at a 7-8% yield at an A-rating, it really doesn’t need to grow it that much. With a 10-15% annualized RoR, of which half for me is yield, I’m perfectly happy “holding” the company here for that income and for that potential. This is one of my “SWAN” investments here. It has potential – others have more, but few have the combined yield and outperformance potential that I see Telenor as having.
That’s why analysts target this company at a low-end target of around 100 NOK, with a high-end of 165 NOK to an average of 139 NOK, up from 125 NOK only a year ago (Source: S&P Global).
At anything close to a double-digit price, or when this company yields 8%, this becomes a “must-buy” for me, and I’m hoping that the next time this happens, my portfolio will be even larger to allow me to expand my position in the business. But even if that is not the case, at anything below 130-140 NOK, with my PT remaining steady at 150 NOK, the company is a “BUY” here.
I update for 2024E with the following thesis.
Thesis
I view Telenor as one of the best telcos in all of Europe, based on its fundamentals and markets. Safer than Orange, and safer than Tele2/Telia. Perhaps Deutsche Telekom (OTCQX:DTEGY) might be as safe, but less than half the current yield. Based on this safety and this yield as well as this upside, I’m marking this company as a “BUY” and considering it with a PT of 150 NOK/share. I am still not lowering my PT here as of 2024. I believe the right way to invest in the business is native shares only, not ADRs. The native share trades on the Oslo Share exchange under the symbol TEL, and I would not invest in any Norwegian company except by buying the native share.
Remember, I’m all about:
1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansions/reversions.
I can no longer call the company “cheap” here, but it fulfills every other one of my investment criteria.
This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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