22 March 2016 Europe/Sweden Equity Research Wireline
TeliaSonera (TLSN.ST) Rating NEUTRAL Price (17 Mar 16, Skr) 41.92 COMPANY UPDATE Target price (Skr) 39.00 Market Cap (Skr m) 181,517.2 Enterprise value (Skr m) 239,294.2 What next? *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ■ We reiterate our Neutral rating and SEK39 PT. We raise our 2016-18E ¹Target price is for 12 months. EBITDA forecasts by 2% but are 2-3% below consensus 2017-18E EBITDA Research Analysts due to Sweden. Henrik Herbst 44 20 7888 0286 ■ Telia's decision to exit Eurasia marks a big shift in strategy after 15 years of [email protected] expansion into EM. After a sale of Eurasia Telia is likely to focus its strategy Jakob Bluestone on becoming the champion of the Nordic region. Telia has a strong position 44 20 7883 0834 [email protected] (#1 or #2) in Sweden and Finland in fixed and mobile, but is only the #3 Justin Funnell mobile player in Denmark, and it lacks access to fixed NGN infrastructure in 44 20 7888 0268 Denmark and Norway something the company highlighted as key. Buying [email protected] TDC would be the easiest way for Telia to address these issues. A sale of Telia DK to 3DK may also be easier from an anti-trust perspective. Buying TDC would be 8-15% FCF per share accretive to Telia over 2018-2020E, on our estimates, improving dividend cover. ■ We raise Swedish EBITDA forecasts 4% (for higher fibre installation revenues) for 2016-18E but are still 1-4% below consensus estimates. Voice line loss remains the main issue and with c.800k of Telia's 1.9m PSTN lines voice-only, we expect line loss to remain high. Telia's fibre installation revenues are set grow in 2016E but then flatten out in 2017E and decline from 2018E, as Telia's fibre roll-out slows. Meanwhile the outlook for mobile remains challenging with pressure on B2B and 4G uptake maturing. ■ Valuation: Telia trades on a 5.4x 2016E proportionate EV/EBITDA before a sale of its Eurasia assets and 6.4x post a sale and settlement of Uzbekistan. 6.4x 2016E EV/EBITDA is in line with the sector (6.4x).
Share price performance Financial and valuation metrics
Year 12/15A 12/16E 12/17E 12/18E Revenue (Skr m) 86,569.4 85,978.7 85,455.4 85,457.1 EBITDA (Skr m) 23,991.5 24,543.5 25,020.6 25,548.5 Adjusted net income (Skr m) 7,878.28 10,443.17 11,212.11 12,103.30 CS EPS (adj.) (Skr) 2.71 3.98 4.05 4.12 Prev. EPS (Skr) 5.41 3.15 3.16 3.20 ROIC (%) 4.8 5.6 5.8 6.0 P/E (adj.) (x) 15.5 10.5 10.4 10.2 P/E rel. (%) 107.0 73.3 78.0 82.3 The price relative chart measures performance against the EV/EBITDA (x) 11.2 9.7 9.4 9.0
OMX AFFARSVARLDENS GENERAL INDEX which closed Dividend (12/16E, Skr) 2.00 Net debt (12/16E, Skr m) 57,777.1 at 469.9 on 17/03/16 Dividend yield (12/16E,%) 4.8 Net debt/equity (12/16E,%) 42.8 On 17/03/16 the spot exchange rate was Skr9.25/Eu 1.- BV/share (12/16E, Skr) 30.2 IC (12/16E, Skr m) 192,699.0 Eu.88/US$1
Current WACC (%) 6.2 EV/IC (12/16E, (x) 1.4 Performance 1M 3M 12M Free float (%) 59.5 Number of shares (m) 4,330.1 Absolute (%) 4.6 0.3 -22.6 Source: Company data, Thomson Reuters, Credit Suisse estimates
Relative (%) 2.6 2.7 -10.8
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
22 March 2016
TeliaSonera (TLSN.ST) Price (17 Mar 2016): Skr41.92; Rating: NEUTRAL; Target Price: Skr39 Income statement (Skr m) 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Revenue 86,569 85,979 85,455 85,457 No. of shares (wtd avg.) 4,330 4,330 4,330 4,330 EBITDA 23,992 24,543 25,021 25,548 (mn)CS EPS (adj.) (Skr) 2.71 3.98 4.05 4.12 Depr. & amort. (12,780) (11,177) (11,109) (11,109) Prev. EPS (Skr) 5.41 3.15 3.16 3.20 EBIT 11,212 13,366 13,911 14,439 Dividend (Skr) 3.00 2.00 2.00 2.00 Net interest exp. (2,917) (2,337) (2,210) (2,001) Dividend yield (%) 7.16 4.77 4.77 4.77 Associates 3,394 3,716 3,992 4,356 Dividend payout (%) 110.82 50.20 49.40 48.53 Other adj. 0 0 0 0 Free cash flow per share 3.82 2.52 3.17 3.24 PBT 11,689 14,745 15,694 16,794 Key(Skr) ratios and valuation 12/15A 12/16E 12/17E 12/18E Income taxes (2,157) (2,801) (2,982) (3,191) Growth (%) Profit after tax 9,532 11,943 12,712 13,603 Sales growth (%) 6.7 (0.7) (0.6) 0.0 Minorities (1,654) (1,500) (1,500) (1,500) EBIT growth (%) (14.9) 19.2 4.1 3.8 Preferred dividends - - - - Net income growth (%) (29.2) 32.6 7.4 7.9 Associates & other 0 0 0 0 EPS growth (%) (24.8) 47.2 1.6 1.8 Net profit 7,878 10,443 11,212 12,103 Margins (%) Other NPAT adjustments 0 0 0 0 EBITDA margin (%) 27.7 28.5 29.3 29.9 Reported net income 7,878 10,443 11,212 12,103 EBIT margin (%) 13.0 15.5 16.3 16.9 Cash flow (Skr m) 12/15A 12/16E 12/17E 12/18E Pretax profit margin (%) 13.5 17.1 18.4 19.7 EBIT 11,212 13,366 13,911 14,439 Net income margin (%) 9.1 12.1 13.1 14.2 Net interest (1,653) (2,246) (2,251) (2,214) Valuation 12/15A 12/16E 12/17E 12/18E Cash taxes paid (3,166) (3,765) (3,863) (4,011) EV/Sales (x) 3.1 2.8 2.7 2.7 Change in working capital (1,721) 0 0 0 EV/EBITDA (x) 11.2 9.7 9.4 9.0 Other cash and non-cash items 30,576 20,744 20,470 20,171 EV/EBIT (x) 23.9 17.9 16.8 15.8 Cash flow from operations 35,249 28,100 28,268 28,386 P/E (x) 15.5 10.5 10.4 10.2 CAPEX (18,699) (17,170) (14,542) (14,345) Price to book (x) 1.9 1.4 1.3 1.3 Free cash flow adj. - - - - Asset turnover 0.3 0.3 0.3 0.3 Free cashflow to the firm 16,550 10,930 13,725 14,040 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E Acquisitions - - - - Divestments - - - - Return on equity stated 7.5 9.1 8.4 8.6 ROIC (%) 4.8 5.6 5.8 6.0 Other investment/(outflows) (10,285) 0 0 0 (%) Cash flow from investments (28,985) (17,170) (14,542) (14,345) Interest burden (x) 1.0 1.1 1.1 1.2 Net share issue/(repurchase) 0 0 0 0 Tax rate (%) 18.5 19.0 19.0 19.0 Financial leverage 1.0 0.6 0.5 0.4 Dividends paid (12,990) (12,990) (8,660) (8,660) Issuance (retirement) of debt - - - - Credit ratios (%) 12/15A 12/16E 12/17E 12/18E Others (6,856) 30,619 (0) 0 Net debt/equity (%) 84.5 42.8 37.4 32.1 Cashflow from financing (19,846) 17,629 (8,660) (8,660) Net debt to EBITDA (x) 3.6 2.4 2.1 1.9 Effect of exchange rates - - - - Interest coverage ratio (x) 3.8 5.7 6.3 7.2 Changes in net cash/debt (13,582) 28,559 5,065 5,380 Share price performance Net debt at start 72,754 86,336 57,777 52,712 Change in net debt 13,582 (28,559) (5,065) (5,380) Net debt at end 86,336 57,777 52,712 47,332 Balance sheet (Skr m) 12/15A 12/16E 12/17E 12/18E Assets Cash & equivalents 14,647 14,647 14,647 14,647 Accounts receivable 27,837 27,590 27,487 27,487 Inventory 1,871 1,844 1,833 1,833 Other current assets 35,812 35,812 35,812 35,812 Total current assets 80,167 79,893 79,779 79,779 Total fixed assets 55,093 58,356 59,415 60,464 Intangible assets and goodwill 67,933 67,933 67,933 67,933 Investment securities 29,401 29,401 29,401 29,401 Other assets 21,422 21,422 21,292 21,292 Total assets 254,016 257,005 257,819 258,869 The price relative chart measures performance against the OMX Liabilities AFFARSVARLDENS GENERAL INDEX which closed at 469.9 on 17/03/16 Accounts payables 21,706 20,534 20,262 20,185 On 17/03/16 the spot exchange rate was Skr9.25/Eu 1.- Eu.88/US$1 Short term debt 9,337 9,337 9,337 9,337 Other short term liabilities 11,597 11,597 11,597 11,597 Total current liabilities 42,640 41,468 41,196 41,119 Long term debt 91,646 63,087 58,022 52,642 Other liabilities 17,528 17,528 17,528 17,528 Total liabilities 151,814 122,083 116,746 111,289 Shareholders' equity 97,884 130,604 136,755 143,262 Minority interests 4,318 4,318 4,318 4,318 Total equity and liabilities 254,016 257,005 257,819 258,869 Net debt 86,336 57,777 52,712 47,332
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
TeliaSonera (TLSN.ST) 2 22 March 2016
Key charts
Figure 1: European telecoms 2016E proportionate EV/EBITDA vs 2016-18E EBITDA CAGR (Telia post Figure 2: Telia growth profile (consolidated) pre- Eurasia disposal) and post a Eurasia disposal
20x Growth profile 2016E 2017E 2018E 2019E 2020E 2016-2019E CAGR Revenues 85,979 85,455 85,457 85,555 85,762 -0.2% 18x - growth y/y -0.7% -0.6% 0.0% 0.1% 0.2% Inwit Drillisch Revenues incl Eurasia 102,063 101,770 101,903 102,142 102,509 0.0% 16x - growth y/y -4.6% -0.3% 0.1% 0.2% 0.4%
Cellnex 14x EBITDA 25,543 25,821 26,048 26,320 26,606 1.0%
Inmarsat - growth y/y 1.0% 1.1% 0.9% 1.0% 1.1% 12x EI Towers EBITDA incl Eurasia 34,251 34,291 34,420 34,589 34,774 0.3% Elisa Rai Way - growth y/y -5.7% 0.1% 0.4% 0.5% 0.5% 10x Iliad SESTelenetComHem Liberty GlobalTEFD FCF 7,044 9,635 9,836 10,049 10,300 12.6% 8x TalkTalkTele2 SCOMKPN Eutelsat VOD*2 - growth y/y 9.0% 36.8% 2.1% 2.2% 2.5% 2016E proportionateEV/EBITDA TLSN BT*2Numericable TI PROXDT NOS FCF incl Eurasia 10,930 13,725 14,040 14,195 14,389 9.1% 6x TDC Mobistar TNORBouygues Orange - growth y/y -26.6% 11.7% 5.3% 1.2% 1.2% TA 4x
2x
0x -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2016E-18E proportionate EBITDA CAGR Source: Credit Suisse estimates Source: Credit Suisse estimates
Figure 3: Credit Suisse estimate of Eurasia exit net proceeds and leverage (pre disposal 1.7x 2016E net Figure 4: Telia 2016E EBITDA consolidated EBITDA debt/EBITDA) breakdown by market post Eurasia exit
Upper case Lower case Base case LatviaEstoniaSpainInternational carrier Sale proceeds 19,805 14,588 17,197 Lithuania2% 3% 3% 1% 4% Eurasia settlement -5,100 -10,200 -7,650 Denmark Cash from Eurasian operations 6,500 3,250 4,875 3% Total net proceeds 21,205 7,638 14,422
Upper case Lower case Base case Norway 12% Net debt (2015) 55,717 55,717 55,717 FCF in 2016E (continuing ops) 6,998 6,998 6,998 Net proceeds from Eurasia disposal 21,205 7,638 14,422 Sweden Dividends paid -12,990 -12,990 -12,990 56% Post-disposal net debt (2016E) 40,504 54,072 47,288
EBITDA continuing ops 25,543 25,543 25,543 Finland 16% Net debt/EBITDA 1.6 2.1 1.9
Source: Credit Suisse estimates Source: Credit Suisse estimates
Figure 6: Telia growth profile pre- and post a Figure 5: Telia market position post Eurasia exit potential TDC acquisition
Fixed* Mobile* Financials 2016E 2017E 2018E 2019E 2020E 2017-20 CAGR Market position 1 2 3 4 1 2 3 4 Revenues Nordics Telia (SEK'm) 85,979 85,455 85,457 85,555 85,762 0.1% Sweden Telia Telenor Com Hem Bredband2 Telia Tele2 Telenor 3 SWE TDC (DKK'm) 23,537 23,226 23,096 23,043 23,069 -0.2% Norway Telenor TDC/Get Altibox** NextGenTel Telenor Telia ICE N/A Combined (SEK'm) 105,308 105,185 105,252 105,490 0.1% Denmark TDC Stofa Telenor Telia TDC Telenor Telia 3 DK Finland Elisa Telia DNA N/A Elisa Telia DNA N/A EBITDA Telia (SEK'm) 25,543 25,821 26,048 26,320 26,606 1.0% Baltics TDC (DKK'm) 9,022 8,821 8,791 8,828 8,933 0.4% Estonia Telia STV Telia Elisa Tele2 Combined (SEK'm) 35,577 35,911 36,536 37,034 1.3% Lithuania Telia Cgate Tele2 Telia Bite FCF per share Latvia Telia*** Telia Tele2 Bite Telia (SEK) 1.62 2.26 2.33 2.38 2.45 2.7% TDC (DKK) 2.42 2.68 2.69 2.82 3.13 5.4% Combined (SEK) 2.41 2.52 2.67 2.80 5.1% - accretion/dilution 8.4% 12.1% 14.5%
Source: Company data, Credit Suisse estimates, *Market position based on fixed broadband Source: Credit Suisse estimates subscribers in fixed and mobile subscriber in mobile, **Altibox consist of several individual fibre providers (generally utilities), ***Telia owns a 49% stake in Lattelecom (incumbent)
TeliaSonera (TLSN.ST) 3 22 March 2016
Forecasts We are in-line with 2016E consensus revenues and EBITDA but 1-3% below consensus 2017E-2018E revenues and EBITDA forecasts. We are more conservative than consensus on Swedish revenues and EBITDA, mainly on fixed voice line loss. Our below-consensus EBITDA also explains most of the 9-15% downside to consensus 2016-18E FCF forecasts for continuing operations (excluding Eurasia). Furthermore, we are not including further dividends from Turkcell after last year's one off dividend payment. We believe some forecasts in consensus include SEK1bn of ongoing dividend income from Turkcell.
Figure 7: TLSN: Credit Suisse vs Consensus
TeliaSonera Group 2016E 2017E 2018E SEK in millions CSe Cons CS v Cons CSe Cons CS v Cons CSe Cons CS v Cons
Net sales 85,979 86,028 -0.1% 85,455 86,501 -1.2% 85,457 87,223 -2.0% EBITDA excluding non-recurring items 25,543 25,558 -0.1% 25,821 26,212 -1.5% 26,048 26,933 -3.3% Reported EBITDA 24,543 24,983 -1.8% 25,021 25,873 -3.3% 25,548 26,502 -3.6% Depreciation, amortization and write-downs -11,177 -11,112 0.6% -11,109 -11,150 -0.4% -11,109 -11,190 -0.7% Income from associated companies 3,716 3,901 -4.7% 3,992 4,101 -2.6% 4,356 4,278 1.8% Operating income excl. non-recurring items 18,082 18,296 -1.2% 18,704 19,040 -1.8% 19,295 19,546 -1.3% Operating income 17,082 18,067 -5.5% 17,904 18,537 -3.4% 18,795 19,393 -3.1% Finance costs and other financial items, net -2,337 -2,563 -8.8% -2,210 -2,411 -8.3% -2,001 -2,297 -12.9% Income after financial items 14,745 15,325 -3.8% 15,694 16,345 -4.0% 16,794 17,146 -2.1% Income taxes -2,801 -3,020 -7.2% -2,982 -3,131 -4.8% -3,191 -3,290 -3.0% Net income from continuing operations 11,943 12,542 -4.8% 12,712 12,912 -1.5% 13,603 13,930 -2.3%
DPS 2.0 2.0 0% 2.0 2.0 0% 2.0 2.11 -5.3% CAPEX 14,441 14,485 -0.3% 12,167 12,110 0.5% 12,159 12,030 1.1% FCF (continuing operations) 7,044 7,738 -9.0% 9,635 10,993 -12.4% 9,836 11,582 -15.1% Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 4 22 March 2016
Figure 8: TLSN: Credit Suisse vs Consensus, revenue and EBITDA by country
Net sales FY 2016e FY 2017e FY 2018e SEK in millions CSe Median CS v Cons CSe Median CS v Cons CSe Median CS v Cons
Sweden 37,011 37,444 -1.2% 36,728 37,427 -1.9% 36,717 37,618 -2.4% Europe 43,205 43,056 0.3% 42,895 43,263 -0.8% 42,837 44,064 -2.8% Finland 13,584 13,130 3.5% 13,552 13,148 3.1% 13,536 13,295 1.8% Norway 8,907 8,707 2.3% 8,956 8,719 2.7% 9,019 8,852 1.9% Denmark 5,635 5,877 -4.1% 5,603 5,968 -6.1% 5,566 6,070 -8.3% Lithuania 3,194 3,153 1.3% 3,257 3,174 2.6% 3,346 3,220 3.9% Latvia 1,609 1,702 -5.5% 1,616 1,778 -9.1% 1,628 1,811 -10.1% Estonia 2,740 2,670 2.6% 2,763 2,677 3.2% 2,777 2,762 0.6% Spain 7,637 7,887 -3.2% 7,234 7,909 -8.5% 7,052 7,947 -11.3% Eliminations & other -97 -96 -97 The Group 85,979 86,028 -0.1% 85,455 86,501 -1.2% 85,457 87,223 -2.0%
EBITDA excluding non-recurring items 2016E FY 2016e FY 2017e FY 2018e SEK in millions CSe Median CS v Cons CSe Median CS v Cons CSe Median Sweden 14,204 14,410 -1.4% 14,221 14,690 -3.2% 14,210 14,828 -4.2% Europe 10,970 10,793 1.6% 11,200 11,184 0.1% 11,438 11,559 -1.0% Finland 4,163 3,958 5.2% 4,149 4,047 2.5% 4,151 4,121 0.7% Norway 2,947 2,867 2.8% 3,015 2,979 1.2% 3,099 3,032 2.2% Denmark 761 764 -0.4% 784 796 -1.5% 807 831 -2.9% Lithuania 1,010 1,055 -4.3% 1,046 1,074 -2.6% 1,104 1,084 1.8% Latvia 561 565 -0.7% 566 576 -1.8% 570 599 -4.9% Estonia 821 809 1.5% 843 832 1.3% 861 843 2.2% Spain 708 769 -8.0% 796 799 -0.4% 846 911 -7.1% The Group 25,543 25,558 -0.1% 25,821 26,212 -1.5% 26,048 26,933 -3.3% Source: Company data, Credit Suisse estimates 2% increase to EBITDA forecasts We raise our EBITDA forecasts for TeliaSonera (excluding Eurasia) by 2% for 2016-18E mainly driven by:
■ Swedish fixed: we raise our fibre installation revenue and broadband revenue forecasts only partly offset by higher ongoing line loss. Overall our Swedish EBITDA forecasts increase by 3.5-4% over 2016E-18E. ■ Finland: raise our Finnish revenue and EBITDA forecasts to reflect continued benign mobile competition and better cost control in Q4 15 ■ Denmark: we raise our Danish EBITDA forecasts to reflect materially better Q4 15 EBITDA trends than we had forecasted and some improvement in mobile competition since we last updated our forecasts This is partly offset by cuts to our forecasts for the Baltic region driven by lower roaming revenues and disappointing results in Spain.
TeliaSonera (TLSN.ST) 5 22 March 2016
Figure 9: TLSN: Summary of changes to forecasts
2016E 2017E 2018E New Old Diff Old FX New Old Diff Old FX New Old Diff Old FX Revenues 85,979 84,577 1.7% 1.6% 85,455 85,043 0.5% 0.4% 85,457 85,801 -0.4% -0.5% clean EBITDA 25,543 24,942 2.4% 2.3% 25,821 25,322 2.0% 1.9% 26,048 25,618 1.7% 1.5% clean EBIT 14,366 13,947 3.0% 2.9% 14,711 14,267 3.1% 2.9% 14,939 14,464 3.3% 3.0%
CAPEX -14,441 -12,631 14.3% 14.3% -12,167 -11,948 1.8% 1.8% -12,159 -11,632 4.5% 4.4%
Revenues Sweden 37,011 36,668 0.9% 0.9% 36,728 36,567 0.4% 0.4% 36,717 36,519 0.5% 0.5% Europe 43,205 43,047 0.4% 0.3% 42,895 43,285 -0.9% -1.0% 42,837 43,745 -2.1% -2.3%
EBITDA Sweden 14,204 13,644 4.1% 4.1% 14,221 13,743 3.5% 3.5% 14,210 13,695 3.8% 3.8% Europe 10,970 10,788 1.7% 1.5% 11,200 11,070 1.2% 0.9% 11,438 11,413 0.2% -0.2% Source: Credit Suisse estimates
Figure 10: TLSN: Changes to revenues and EBITDA forecasts
2016E 2017E 2017E 2017E New Old Diff Diff New Old Diff Diff New New Diff Diff Revenues Sweden 37,011 36,668 0.9% 0.9% 36,728 36,567 0.4% 0.4% 36,717 36,519 0.5% 0.5% - mobile service revenues 14,002 14,107 -0.7% -0.7% 14,097 14,125 -0.2% -0.2% 14,141 14,145 0.0% 0.0% - fixed service revenues 17,864 17,546 1.8% 1.8% 17,691 17,407 1.6% 1.6% 17,636 17,320 1.8% 1.8% Finland 13,584 13,151 3.3% 3.6% 13,552 13,122 3.3% 3.6% 13,536 13,104 3.3% 3.6% Norway 8,907 9,128 -2.4% -3.9% 8,956 9,130 -1.9% -3.4% 9,019 9,173 -1.7% -3.2% Denmark 5,635 5,753 -2.0% -1.8% 5,603 5,704 -1.8% -1.5% 5,566 5,682 -2.1% -1.8% Lithuania 3,194 3,275 -2.5% -2.3% 3,257 3,508 -7.2% -7.6% 3,346 3,853 -13.2% -14.8% Latvia 1,609 1,563 2.9% 3.7% 1,616 1,574 2.7% 3.4% 1,628 1,592 2.2% 3.0% Estonia 2,740 2,745 -0.2% 0.1% 2,763 2,850 -3.0% -2.8% 2,777 2,982 -6.9% -6.6% Spain 7,637 7,518 1.6% 2.1% 7,234 7,481 -3.3% -2.8% 7,052 7,445 -5.3% -4.8%
EBITDA Sweden 14,204 13,644 4.1% 4.1% 14,221 13,743 3.5% 3.5% 14,210 13,695 3.8% 3.8% Finland 4,163 3,762 10.7% 10.1% 4,149 3,752 10.6% 10.0% 4,151 3,752 10.6% 10.0% Norway 2,947 2,941 0.2% -0.2% 3,015 2,962 1.8% 1.3% 3,099 3,024 2.5% 2.0% Denmark 761 633 20.2% 20.5% 784 627 25.0% 25.3% 807 625 29.1% 29.5% Lithuania 1,010 1,103 -8.4% -8.2% 1,046 1,199 -12.7% -13.1% 1,104 1,349 -18.1% -19.7% Latvia 561 516 8.8% 9.6% 566 520 8.9% 9.7% 570 525 8.4% 9.2% Estonia 821 932 -12.0% -11.7% 843 1,037 -18.7% -18.5% 861 1,169 -26.4% -26.2% Spain 708 902 -21.6% -21.2% 796 973 -18.2% -17.8% 846 968 -12.6% -12.1% Source: Credit Suisse estimates
We forecast TeliaSonera revenue growth to slow to organically to 0.2% versus 2.4% mainly due to Swedish revenues declining by 0.9% in 2016 after group revenues having grown by 2.4% organically in 2015 with a small improvement in fixed more than offset by worse mobile revenue trends, see Figure 11. We forecast EBITDA excluding non-recurring to grow 0.9% organically in 2016, ahead of Telia's guidance of flat versus 2015. This represents a small improvement versus 0.1% growth in 2015, mainly due from the other Nordic operations.
TeliaSonera (TLSN.ST) 6 22 March 2016
Figure 11: TLSN: Summary of forecasts
TeliaSonera summary 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Revenues 101,579 81,131 86,569 85,979 85,455 85,457 85,555 85,762 - growth y/y -3.3% -20.1% 6.7% -0.7% -0.6% 0.0% 0.1% 0.2% - organic growth y/y 2.4% 0.2% -0.6% 0.0% 0.1% 0.2%
EBITDA (excl non-recurring) 35,583 24,364 25,281 25,543 25,821 26,048 26,320 26,606 - growth y/y -1.6% -31.5% 3.8% 1.0% 1.1% 0.9% 1.0% 1.1% - organic growth y/y 0.1% 0.9% 1.1% 0.9% 1.0% 1.1% - margin 35.0% 30.0% 29.2% 29.7% 30.2% 30.5% 30.8% 31.0%
Net income 19,042 12,216 11,722 17,252 17,530 17,845 18,149 18,292 - growth y/y -5.6% -35.8% -4.0% 47.2% 1.6% 1.8% 1.7% 0.8%
EPS (ex non-recurring) 4.40 3.60 2.71 3.98 4.05 4.12 4.19 4.22 - growth y/y -5.6% -18.1% -24.8% 47.2% 1.6% 1.8% 1.7% 0.8% DPS 3.0 3.0 3.0 2.0 2.0 2.0 2.0 2.0 - growth y/y 5.3% 0.0% 0.0% -33.3% 0.0% 0.0% 0.0% 0.0%
CAPEX 14,726 16,205 18,699 17,170 14,542 14,345 14,329 14,327 - as % of sales 14.5% 20.0% 21.6% 20.0% 17.0% 16.8% 16.7% 16.7% equity FCF (TLSN def incl Eurasia) 16,310 13,047 16,550 10,930 13,725 14,040 14,195 14,389 - growth y/y -31.3% -20.0% 26.8% -34.0% 25.6% 2.3% 1.1% 1.4% equity FCF (continuing operations) 8,142 12,520 7,044 9,635 9,836 10,049 10,300 - growth y/y 53.8% -43.7% 36.8% 2.1% 2.2% 2.5%
Net debt 55,774 59,320 55,717 57,777 52,712 47,332 41,797 36,068 Net debt/EBITDA 1.57 2.43 2.20 2.26 2.04 1.82 1.59 1.36 Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 7 22 March 2016
Valuation As Telia is in the process of selling its Eurasian business look at Telia's valuation post a sale (assuming the base case), making the following assumptions on sales proceeds: Figure 12: Proceeds from Eurasia disposal In SEK millions, unless otherwise stated Upper case Lower case Base case Sale proceeds 19,805 14,588 17,197 Eurasia settlement -5,100 -10,200 -7,650 Cash from Eurasian operations 3,250 3,250 3,250 Total net proceeds 17,955 7,638 12,797
Upper case Lower case Base case Net debt (2015) 55,717 55,717 55,717 FCF in 2016E (continuing ops) 6,998 6,998 6,998 Net proceeds from Eurasia disposal 17,955 7,638 12,797 Dividends paid -12,990 -12,990 -12,990 Post-disposal net debt (2016E) 43,754 54,072 48,913 EBITDA continuing ops 25,543 25,543 25,543 Net debt/EBITDA 1.7 2.1 1.9 Source: Credit Suisse estimates, Company data
Post the disposal of Eurasia, Telia would trade on 6.4x 2016E proportionate EV/EBITDA (see Figure 13), adjusting EV and EBITDA for Telia's proportionate stakes in Turkcell and MegaFon. On a consolidated basis, excluding the market value of Telia's stakes in Turkcell and MegaFon, Telia would trade on 6.7x 2016E EV/EBITDA on a similar growth rate. Telia is further trading on a proportionate FCF yield of 4.7% in 2016E, again after a Eurasia disposal, well below the sector at 5.9% due to the accelerated CAPEX investment at Telia in 2016E. However, Telia is trading at a 6.7% 2017E proportionate equity FCF yield, merely in line with the sector at 6.6%. So, Telia is trading at a small premium to broadly in line with the sector on EV/EBITDA and FCF yield versus the sector despite a considerable amount of uncertainty around Telia's Eurasia exit remaining.
TeliaSonera (TLSN.ST) 8 22 March 2016
Figure 13: TLSN: Valuation overview (post sale of Eurasia)
2016E 2017E 2018E 2019E Share price 41.62 Market cap 180,218 180,218 180,218 180,218 Consolidated net debt 48,913 47,785 46,372 44,717 Add back: proportionate associate net debt 5,873 4,183 1,776 -802 Proportionate net debt 54,786 51,968 48,148 43,915 Deduct: cumulative dividends paid 12,990 21,651 30,311 38,972 EV 216,140 206,352 196,279 185,963 Proportionate EV 222,014 210,535 198,055 185,161
Consolidated EBITDA 25,543 25,821 26,048 26,320 Add: Proportionate MegaFon EBITDA 4,007 3,967 3,871 3,778 Add: Proportionate Turkcell EBITDA 4,882 5,270 5,618 5,816 Add: Proportionate associate EBITDA 8,889 9,237 9,489 9,594 Proportionate EBITDA 34,433 35,057 35,538 35,914
Consolidated EV/EBITDA 6.7 6.3 5.8 5.4 Proportionate EV/EBITDA 6.4 6.0 5.6 5.2 Proportionate EV/EBITDA - incl Eurasia 5.4 4.9 4.5 4.1
Consolidated FCF (ex dividend from associates) 5,798 8,588 8,873 9,116 Add back: Proportionate MegaFon FCF 1,384 1,590 1,633 1,584 Add back: Proportionate Turkcell FCF 1,231 1,857 2,169 2,201 Add back: Proportionate associate FCF 2,615 3,447 3,802 3,785 Proportionate FCF 8,413 12,035 12,675 12,901
Consolidated equity FCF yield 4.3% 6.3% 6.5% 6.7% Proportionate equity FCF yield 4.7% 6.7% 7.0% 7.2% Proportionate equity FCF yield - incl Eurasia 6.9% 8.9% 9.2% 9.3%
DPS 2.00 2.00 2.00 2.00 Dividend yield 4.8% 4.8% 4.8% 4.8% - dividend payable as % of FCF 123.8% 88.5% 86.0% 84.0% Source: Credit Suisse estimates
TeliaSonera (TLSN.ST) 9 22 March 2016
Post a Eurasia disposal, Telia 2016-2018E proportionate EBITDA CAGR would be 1.6%. Versus the rest of the sector Telia is then trading at a small discount versus its growth rate (see Figure 14). This discount is, in our view, warranted by the 26% of proportionate EBITDA coming from Turkcell and Megafon, both trading at discount multiples to European telecoms.
Figure 14: European telecoms 2016E proportionate EV/EBITDA vs 2016-18E EBITDA CAGR (TLSN ex Eurasia
20x
18x Inwit Drillisch
16x
Cellnex 14x
Inmarsat 12x EI Towers Elisa Rai Way
10x Iliad SESTelenetComHem Liberty GlobalTEFD 8x TalkTalkTele2 SCOMKPN Eutelsat VOD*2 2016E proportionateEV/EBITDA TLSN BT*2Numericable TI PROXDT NOS 6x TDC TNORBouygues MobistarOrange TA 4x
2x
0x -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2016E-18E proportionate EBITDA CAGR
Source: Credit Suisse estimates
TeliaSonera (TLSN.ST) 10 22 March 2016
Eurasia disposal On the 17 September 2015 TeliaSonera announced it would no longer be a long-term owner of its subsidiaries in Eurasia. This was a big announcement and a reversal of strategy c.15 years after TeliaSonera entered Eurasia through the creation of Fintur (owned by Sonera, Turkcell and Cukurova). It was in reaction to the investigations started in 2012 regarding how Telia acquired its licenses in Uzbekistan. With close to 30% of EBITDA generated from the Eurasian business and just over 40% of consolidated FCF, divesting the Eurasian assets will materially change the structure of the group. The ownership of the Eurasian assets are a mix of direct and indirect holdings (through Fintur, Turkcell and other holding companies) - Figure 15 and Figure 16, with Kcell in Kazakhstan the only listed asset. This makes an exit complicated, as Telia needs to take into account the minority shareholders in the assets. Of the Eurasian assets, Kazakhstan is the largest with Nepal (which has now been sold), Uzbekistan and Azerbaijan the other assets of size (see Figure 15).
Figure 15: TeliaSonera overview of Eurasian holdings
Eurasia assets Kazakhstan Azerbaijan Georgia Moldova Tadjikistan Nepal (SOLD) Uzbekistan EBITDA* (100% consolidated, SEK'm) 2,041 1,107 266 102 190 2,877 2,125
Direct stake 24.0% 94.0% Indirect, through: 60.0% 60.4% - Fintur 29.9% 30.0% 58.6% 58.6% - Turkcell 8.0% 8.1% 15.7% 15.7% Effective stake 61.9% 38.1% 74.3% 74.3% 60.0% 60.4% 94.0% Source: Company data, *2016E
Figure 16: TeliaSonera Eurasian asset holding structures
Source: Company data
As Telia now expect to divest its Eurasian assets over the next twelve months the company has started to report Eurasia as a discontinued operation in its accounts. In addition, it has stopped reporting details by country for the Eurasian assets. Looking at the
TeliaSonera (TLSN.ST) 11 22 March 2016
last reported results (Q3 15 see Figure 17) performance gradually deteriorated over the last three years with Kazakhstan in particular being hit by competitive as well as macro economic pressure. From having grown EBITDA in organic currency by 17% 2013, Telia's Eurasian assets saw EBITDA decreasing by 8% in Q3 15 y/y.
Figure 17: TLSN Eurasia overview
2012 2013 2014 Q1 15 Q2 15 Q3 15 Eurasia summary Kazakhstan 8,256 8,111 7,248 1,951 1,950 1,712 Azerbaijan 3,934 3,824 3,778 938 853 888 Uzbekistan 2,369 3,118 3,613 1,032 1,112 1,178 Tajikistan 927 932 857 206 182 185 Georgia 1,011 915 874 210 195 209 Moldova 536 512 497 126 149 134 Nepal 2,716 3,023 3,593 1,130 1,294 1,182 Other/Eliminations -19 -21 -2 3 5 -5 Net sales 19,731 20,414 20,458 5,597 5,740 5,484 - growth y/y 3.5% 0.2% 21.1% 13.9% 0.3% - % of Group net sales 18.8% 20.1% 25.2% 27.2% 26.6% 25.2%
Growth in local ccy Kazakhstan 4.1% -0.6% -6.4% -11.0% -7.3% Azerbaijan 1.0% -7.1% 6.3% -2.1% -7.1% Uzbekistan 51.0% 21.6% 11.8% 8.6% 11.6% Tajikistan 15.3% -19.2% -9.1% -8.1% -11.1% Georgia -5.2% -4.3% -2.2% -3.1% -1.8% Moldova 3.8% 2.2% 18.3% 29.6% 14.2% Nepal 27.7% 17.2% 14.0% 21.4% 11.9% Total Eurasia 12.4% 4.4% 3.7% 1.8% -3.2%
EBITDA, ex non-recurring Kazakhstan 4,602 4,481 4,032 1,057 994 741 Azerbaijan 1,964 1,912 2,042 495 503 501 Uzbekistan 904 1,680 1,944 534 607 647 Tajikistan 470 472 364 66 54 53 Georgia 397 385 355 66 75 76 Moldova 193 185 131 25 43 25 Nepal 1,614 1,803 2,155 681 819 762 Other/Eliminations -137 -114 -163 -16 -41 -31 EBITDA, ex non-recurring 10,007 10,804 10,859 2,908 3,054 2,773 - growth y/y 8.0% 0.5% 15.1% 11.4% -4.0% - margin 50.7% 52.9% 53.1% 52.0% 53.2% 50.6% - % of Group EBITDA 27.7% 30.4% 44.6% 51.6% 49.8% 39.9%
EBITDA growth in local ccy Kazakhstan 3.2% 0.0% -12.4% -19.9% -27.8% Azerbaijan 1.1% 0.4% 6.3% 2.5% -5.7% Uzbekistan 113.3% 21.4% 1.0% 8.2% 17.0% Tajikistan 15.3% -32.2% -35.0% -38.7% -46.4% Georgia 1.4% -7.6% -25.2% -5.7% -13.0% Moldova 4.6% -25.4% 65.1% 15.0% -33.6% Nepal 28.2% 17.8% 11.3% 25.2% 24.1% Eurasia 17.1% 4.2% -2.1% -2.7% -8.2% Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 12 22 March 2016
Slightly improved growth profile post a Eurasia disposal Post a divestment of the Eurasian assets, on a consolidated basis TeliaSonera is becoming almost a pure Nordic + Baltic company with 95% of EBITDA coming from the region (85% from the Nordic region). Furthermore, Sweden on a consolidated basis would make up 55% of consolidated EBITDA and would increase in importance even further from current levels. See Figure 18 for detailed breakdown of consolidated EBITDA. On a proportionate basis however (taking into Telia's stakes in Turkcell and Megafon), Telia continues to have a material exposure to emerging markets with MegaFon (Russia) and Turkcell (Turkey) contributing 26% of proportionate EBITDA (our EBITDA base valuation purposes), Figure 19.
Figure 18: TeliaSonera consolidated EBITDA by Figure 19: TeliaSonera proportionate EBITDA by market market (incl MegaFon and Turkcell)
LatviaEstoniaSpainInternational carrier Lithuania2% 3% 3% 1% Turkcell 4% 14% Denmark 3%
MegaFon 12% Norway Sweden 12% 41% International carrier 1% Spain 2% Sweden Latvia 56% Estonia 2% 2% Lithuania 3% Finland Denmark Finland 2% 12% 16% Norway 9%
Source: Credit Suisse estimates Source: Credit Suisse estimates
The growth profile of Telia post a divestment of the Eurasian businesses will improve somewhat on EBITDA and FCF (see Figure 20). EBITDA growth remains modest however at 1.0% 2016-2019E CAGR, while FCF growth of 12.6% is boosted mainly by TeliaSonera finishing its fibre roll-out in Sweden.
Figure 20: TeliaSonera growth profile pre- and post Eurasia disposal
Growth profile 2016E 2017E 2018E 2019E 2016-2019E CAGR Revenues 85,979 85,455 85,457 85,555 -0.2% - growth y/y -0.7% -0.6% 0.0% 0.1% Revenues incl Eurasia 102,063 101,770 101,903 102,142 0.0% - growth y/y -4.6% -0.3% 0.1% 0.2%
EBITDA 25,543 25,821 26,048 26,320 1.0% - growth y/y 1.0% 1.1% 0.9% 1.0% EBITDA incl Eurasia 34,251 34,291 34,420 34,589 0.3% - growth y/y -5.7% 0.1% 0.4% 0.5%
FCF 7,044 9,635 9,836 10,049 12.6% - growth y/y 9.0% 36.8% 2.1% 2.2% FCF incl Eurasia 10,930 13,725 14,040 14,195 9.1% - growth y/y -26.6% 11.7% 5.3% 1.2% Source: Credit Suisse estimates
TeliaSonera (TLSN.ST) 13 22 March 2016
We expect SEK8-18bn of net proceeds from Eurasia exit Since the announcement of the Eurasian exit, TeliaSonera has already announced the sale of its 60.4% indirect stake in the Nepalese business Ncell for $1,030m, implying a 12 month rolling EV/EBITDA of 5.0x. In total, including compensation for cash in Ncell, TeliaSonera expect SEK7.5bn in cash proceeds from the sale. We set out the breakdown of the proceeds in Figure 21. Of the SEK11.2bn gross proceeds TeliaSonera expects to receive a net amount of SEK7.5bn (after provisions relating mainly to tax).
Figure 21: Proceeds from Nepal sale
Assets sold Nepal Indirect stake 60.4% Proceeds (usd'm) 1,030
Additional economic interest 20% Proceeds (usd'm) 48
Total gross sale proceeds (usd'm) 1,078 Total gross sale proceeds (SEK'm) 9,253
Net cash (usd'm) 284 TLSN stake 80.4% TLSN stake (usd'm) 228 TLSN stake (SEK'm) 1,960
Total gross proceeds (SEK'm) 11,213 Provisions (mainly tax) -3,713 total net proceeds 7,500 Source: Credit Suisse estimates, Company data
Most of the remaining Eurasian assets of size are held through Telia's 58.55% stake in Fintur. So, a sale of Telia's stake in Fintur would leave Telia with a 24% direct stake in Kcell, its 60% indirect stake in Tadjikistan and its 94% stake in Uzbekistan, see Figure 22. The direct stake in Kcell which is a listed entity, we believe would be interesting to whoever acquires Telia's 58.55% stake in Fintur. Tadjikistan is one of the smallest assets with SEK200m of EBITDA contribution (less than 1% of group), so Uzbekistan would be the main residual challenge. Through its holding in Turkcell, Telia would continue to be exposed to Eurasia as Turkcell owns the 41.45% stake in Fintur not held by Telia. Turkcell is generally viewed as the front runner to acquire Telia's stake in Fintur, however, as Telia does not control or consolidate Turkcell the exposure would have less impact on Telia financials. For Telia's stake in Fintur we have assumed a 2016E EV/EBITDA range of 3.5-4.5x. The mid-point of this range broadly reflect the current trading multiple of Kcell. The assumed 3.5-4.5x range does not imply a big discount versus current trading multiples, which we believe is warranted, as whoever acquired Telia's stake in Fintur would gain control (as Telia holds a 58.55% stake). Uzbekistan, in our view, would be the most difficult asset to sell as there are material restrictions on Telia who they could sell to. Furthermore, Telia's dealings in Uzbekistan is what prompted the decision to leave the whole region. To reflect the risk of a failed disposal of Uzbekistan, we have assumed a much lower range of values we believe Telia could get from a sale with the floor on zero, basically assuming Telia walking away from the asset. This does not include the potential settlement charge however which would still come on top.
TeliaSonera (TLSN.ST) 14 22 March 2016
For Telia's direct stake in Kcell we assume a 5-15% discount versus the current market share price on the sale. In total, including the sale of Nepal which has already been announced, on the above assumptions, Telia would get total proceeds of SEK14-19bn. Figure 22: TLSN: Overview of Eurasia disposals
Eurasia assets Kazakhstan Azerbaijan Georgia Moldova Tadjikistan Nepal* Uzbekistan 2016E EBITDA 2,041 1,107 266 102 190 2,877 2,125
Direct stake 24.0% 94.0% Indirect, through: 60.0% 60.4% - Fintur 29.9% 30.0% 58.6% 58.6% - Turkcell 8.0% 8.1% 15.7% 15.7% Effective stake 61.9% 38.1% 74.3% 74.3% 60.0% 60.4% 94.0%
Disposals: Direct (y/n) y n y y y y y Indirect (y/n) n n n n y y n Fintur (y/n) y y y y y y y via Turkcell (y/n) n n n n n n n
Stake sold 53.9% 30.0% 58.6% 58.6% 60.0% 60.4% 94.0%
2016E EV/EBITDA (upper range) 4.5x 4.5x 4.5x 4.5x 4.5x 2.0x 2016E EV/EBITDA (lower range) 3.5x 3.5x 3.5x 3.5x 3.5x 0.0x
Discount vs mkt cap (upper range) 5% Discount vs mkt cap (lower range) 15%
Total proceeds Proceeds upper end 5,334 1,495 701 269 512 7,500 3,995 19,805 Proceeds lowed end 4,772 1,163 545 209 398 7,500 0 14,588 Source: Credit Suisse estimates, *Asset sold 21 Dec 2015
Eurasian settlement to offset some of sales proceeds Offsetting the sales proceeds is the likely settlement relating to Telia's Uzbekistan business. Both the US DoJ and the Dutch government are investigating suspicious payments made by Telia relating to the company's acquisition of its license in Uzbekistan. In a separate case, Vimpelcom recently announced a settlement of $795m (after having made a $900m provision) regarding its dealings in Uzbekistan and prior dealings with Takilant Ltd (Takilant Ltd is also the counterpart to Telia). In our analysis, we have assumed a range of the potential settlement of $600m to $1.2bn, capturing both the Vimpelcom settlement. Cash repatriation from Eurasian assets Telia has stated it has around SEK9.4bn (with its Q3 15 results, no update since then) of net cash in its Eurasian assets. SEK5.8bn of this in Nepal and Uzbekistan broadly split 50/50 between the two. While Telia managed to negotiate the acquirer of its Nepalese business to reimburse Telia for the cash, we believe it is more uncertain whether Telia will get reimbursed for the cash in the other Eurasian assets. To reflect this risk, we assume a repatriation rate of 50% of the remainder of the cash in the Eurasian assets, implying Telia would receive SEK3,250m of cash.
TeliaSonera (TLSN.ST) 15 22 March 2016
We assume net proceeds of SEK13bn from Eurasia exit as our base case Using the above assumptions as our base case, in summary:
■ 4.0x 2016 EV/EBITDA for Telia's 58.55% stake in Fintur and 60% indirect stake in Tadjikistan ■ 1.0x 2016 EV/EBITDA for Telia's 94% stake in Uzbekistan ■ 10% discount to market value of Telia's 24% stake in Kcell ■ The already announced sale of Ncell in Nepal closes and Telia receives the guided SEK7.5bn of proceeds ■ 50% repatriation of net cash held in the Eurasian assets These assumptions imply net proceeds of c.SEK13bn of net proceeds from Telia's sale of Eurasian assets (see Figure 23). Comparing our base case to our upper (best) case and lower case, the deviation is SEK5.2bn delta, c.SEK1.2 per share (+/-3% vs current share price of SEK40). Figure 23: Net proceeds analysis from Eurasia disposal In SEK millions, unless otherwise stated Upper case Lower case Base case Sale proceeds 19,805 14,588 17,197 Eurasia settlement -5,100 -10,200 -7,650 Cash from Eurasian operations 3,250 3,250 3,250 Total net proceeds 17,955 7,638 12,797 Source: Credit Suisse estimates, Company data
Due to the likely settlement fee (we assume $900m in our base case) relating to the US DoJ investigation into Telia's Uzbekistan business and the 50% repatriation assumed by us of cash held in the Eurasian assets the disposal of Eurasia will mean an increase in leverage at the remaining TeliaSonera group. As set out in Figure 24, we expect TeliaSonera's end of 2016E leverage post disposal to end up at 1.7-2.1x versus 1.7x on our forecasts if Telia continued to run the group as it stands, including Eurasia. Even in the worst case scenario however, we believe Telia would remain within its guidance of leverage at 2.0x (+/-0.5x), consistent with an A- to BBB+ credit rating.
Figure 24: TeliaSonera group leverage post Eurasia exit
Upper case Lower case Base case Net debt (2015) 55,717 55,717 55,717 FCF in 2016E (continuing ops) 6,998 6,998 6,998 Net proceeds from Eurasia disposal 17,955 7,638 12,797 Dividends paid -12,990 -12,990 -12,990 Post-disposal net debt (2016E) 43,754 54,072 48,913
EBITDA continuing ops 25,543 25,543 25,543 Net debt/EBITDA 1.7 2.1 1.9 Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 16 22 March 2016
What next? Telia's decision to exit Eurasia reverses a 15 year old strategy of diversifying beyond its core Nordic and building up an extensive Eurasian footprint. Post a disposal Telia is back to being close to a pure Nordic+Baltic business with the only business outside of the region being Yoigo in Spain. Spain is a relatively small business, accounting for 3% of consolidated (EBITDA excluding Eurasia) and has been up for sale for some time now. Recent press reports (eg Telecompaper, 26 Feb 2016) further suggest Telia has started a formal sales process. So, Telia is now left with no alternative than to confront its strategy in the Nordic+Baltic region. Indeed Telia has described its strategy to be a "Nordic champion". We set out Telia's current position in the seven markets in Figure 25. Denmark and Norway stands out as notable gaps, with Telia completely lacking a fixed presence in Norway. In Denmark Telia is only #3 on mobile (vs top 2 in the other Nordic markets) and #4 on fixed. Having met with the regional CEOs of Telia's businesses in Denmark and Norway over the last 9 months, we believe gaining access to fixed NGN technology is a strategic priority for Telia. Convergence (ie having fixed and mobile capabilities) have also been stated by Johan Dennelind, the CEO of TeliaSonera group as a core focus for the group. Figure 25: Nordic+Baltic market positioning Market Fixed* Mobile* position 1 2 3 4 1 2 3 4 Nordics Sweden Telia (incumbent) Telenor (ULL+fibre+cable) Com Hem (cable) Bredband2 (fibre wholesale) Telia Tele2 Telenor 3 SWE Norway Telenor (incumbent) TDC/Get (Cable) Altibox** (fibre) NextGenTel (ADSL+VDSL) Telenor Telia ICE N/A Denmark TDC (incumbent+cable) Stofa (cable) Telenor (ULL/BSA) Telia (ULL/BSA) TDC Telenor Telia 3 DK Finland Elisa (copper+cable+fibre) Telia (copper+cable+fibre) DNA (copper+cable+fibre) N/A Elisa Telia DNA N/A
Baltics Estonia Telia Telia Elisa Tele2 Lithuania Telia Tele2 Telia Bite Latvia 49% stake in Lattelecom Telia Tele2 Bite Source: Company data, Credit Suisse Acquiring TDC would make strategic sense In, our view, there are some strong strategic incentives for TLSN to acquire TDC as it would resolve several outstanding strategic issues: ■ Potential to drive market repair in Denmark ■ Gaining access to fixed in Norway ■ Completing the coverage and the Nordic+Baltics footprint. Telia would be the only operator with a fixed+mobile footprint across the Nordics and Baltics. It would be the incumbent in Sweden, Denmark, Finland (partly), Lithuania and Estonia. In addition owning a 49% associate stake in the leading fixed line provider Lattelecom in Latvia. A potential Telia/TDC bid has been reported in press for several years. For example,
■ In 2001 Telia looked at bidding for TDC (telecompaper 25 May 2001) ■ In 2004 TDC’s CEO at the time said “I doubt if they have the muscle to make a bid for us,” (Total Telecom, 21 January 2004, citing Dagens Industri) ■ In 2005 TDC was reported to consider a bid for TDC (Breaking Views 13 September 2005)
TeliaSonera (TLSN.ST) 17 22 March 2016
■ In 2015 the local press reported that Telia could bid for TDC following its acquisition of GET in Norway (TV2, 17 September 20014) Potential for market repair in Denmark For the last few years, the Danish mobile market has been one of the toughest in Europe with four network operators in a country with 5.6m inhabitants and revenues trends that are the worst in Europe (see Figure 26). TeliaSonera tried to consolidate the market during 2015 by merging its business with Telenor's Danish business (after having merged the networks in 2011). However, Telia and Telenor backed off from the deal after strong opposition from the EC, before the deal could get officially drejected. Figure 26: Europe mobile service revenue growth
4% 3.3%
1.7% 1.6% 2% 1.3% 1.1% 0.1% 0% -0.3% -0.4% -0.5% -0.7% -1.1% -2% -1.6% -1.9% -2.1% -2.9% -4%
Mobil service revenue growth y/y growth revenue serviceMobil -4.2%
-6% -6.3%
-8% FIN SWE AUT IRE BEL ITA NOR POR FRA GER EUR NEL SWI UK (£) GRE SPA DEN
Q315 Q415
Source: Company data, Credit Suisse
In addition, the Danish fixed line market has also recently become more challenging due to OTT cannibalisation of TV services and falling fixed broadband prices. As a result of some of the lowest mobile prices in Europe (eg €12 for 10GB), EBITDA margins for the three mobile challengers are very low at 11-21% (Figure 27) with minimal FCF generation.
TeliaSonera (TLSN.ST) 18 22 March 2016
Figure 27: Danish EBITDA margins
50% 45.9% 45% 43.2%
40%
35%
30%
25% 21.2% 21.3% 20% 14.6% 15% 13.4% 12.6% 11.4% 10%
5%
0% TDC 3 DK Telia DK TNOR DK
2014 2015
Source: Company data
Danish Consumer mobile tough, though recently improved slightly We have seen some rebounds in mobile pricing in Denmark over the last few years when price points gone below replacement marginal cost. While this has driven temporary improvement in service revenue trends, prices have then tended to fall back again sometimes further than prior to the price increases. For example, after prices on the benchmark bundle with quasi unlimited everything fell in 2011-2012 to DKK119/month (from +DKK200/month) and then rebounded to DKK 149-169/month (25-40%) between H2 12 and 2013, TDC Consumer MSR trends rebounded by 13pp to -5% from -18%). However, a year later prices again dropped, this time to DKK79-99/month and growth rates again worsened (to high single digit declines). In the three months after the merger between Telia DK and TNOR DK failed we have seen some selective price increases again:
■ 13 Oct: TDC raised the entry-level tariff for new customers on its 3 no-frills tariffs from DKK99 to DKK109, i.e. a 10% price hike. ■ 16 Oct: Telia raised the entry level tariff on its mobile tariffs from DKK99 to DKK109 ■ 21 Oct: Telenor raised the entry level tariff on its mobile tariffs from DKK99 to DKK109 ■ 5 Nov: 3DK raised its no-frills tariff from DKK79 to DKK89 (its premium tariff is still DKK99) ■ 23 Nov: TDC raised the price of second SIMs on the main TDC brand (from DKK99 to DKK119) though the entry level price point was unchanged at DKK149 ■ 27 Nov: TDC raised prices for entry level customers for a second time, this time taking the entry level price point to DKK119. ■ 16 Dec: TLSN follows and raises pricing on its no-frills brand from DKK109/month to DKK119/month on the benchmark quasi unlimited tariff with 20h of voice, 20GB of data and unlimited SMS volumes. On the Telia brand, the entry level tariff increased in price to DKK129/month (from DKK109/month). ■ March 2016: TDC has announced it will increase back book prices on two of its no-frills brands in March and April Whether these price increases stick or not remains to be seen. So far, price increases have been only temporary with prices reversing to similar or lower levels.
TeliaSonera (TLSN.ST) 19 22 March 2016
Danish mobile consolidation could still happen, in our view We believe Danish consolidation failed due to several very deal-specific issues, rather than a general opposition by the EC to allowing 4-to-3 in Europe – or indeed in Denmark. The proposed Telia DK/Telenor DK would effectively have turned Denmark into a two- player market in the important B2B segment, would have led to an unusually high concentration of market share, have created a bigger-than-usual risk of price hikes in a market with a history of some potential price co-ordination. These issues might not apply to a different structure of Danish mobile consolidation. Furthermore, Telia believes not even a new attempt on Telenor and Telia would be completely off the table, if the process were just managed in a different way. CK Hutchison Holdings, the parent of 3 DK has already consolidated Ireland and in Austria and is in the process of consolidating the UK and Italy, and we believe would be keen on also acquiring Denmark. However, so far we haven't seen any attempt from 3DK. So, consolidation could still happen in Denmark in our view and a sale of Telia DK to 3DK may be easier from an anti-trust perspective, From a strategic perspective, we believe the case for TLSN to stay in Denmark is much stronger than for TNOR. This is mainly due to the business segment where there is a big overlap with Swedish businesses in the other European countries. Acquiring TDC would provide access to Norwegian fixed One of the big gaps in TeliaSonera's footprint is the lack of fixed infrastructure in Norway (Norway is 12% of Telia's consolidated EBITDA). While the consumer market has not yet moved towards convergent bundles, we believe being able to offer a convergent solution is core to TeliaSonera's longer term strategy. In addition Telia's strategy in Norway is to increase its market share in the corporate segment. This is a segment which we believe could be more tempted to move to a provider of convergent services. By acquiring TDC, including GET, Telia would immediately pass c.600k homes (1/4 of Norwegian households) with cable. The other most likely alternative if Telia wanted to own NGN infrastructure in Norway would be to acquire Altibox, a consortium of local utility companies having rolled out fibre. By the end of 2015 Altibox as a whole (including all local utility companies) had 406.8k subscribers. While this would be a good fit for Telia, we believe the ownership structure may make a straight takeover difficult as Telia would have to negotiate with each party individually. The alternative to acquiring a fixed line asset in Norway would be using wholesale access agreements. Telia has already tried to break in to the fixed market in Norway on a wholesale basis on copper, but gave up and sold its ULL business NextGenTel in 2012. We believe entering the fibre market as a wholesale provider would be even more difficult due to the unsufficient regulatory environment. Telenor is the only fibre operator being regulated, and this is only on an access basis with pricing itself unregulated (a margin squeeze test is applied). Looking at Telenor's fibre wholesale pricing in Figure 27 versus Telenor's retail pricing, the wholesale price for a 100Mbps fibre connection is just 9% below Telenor's retail price ex VAT. This leaves little room anyone to price at a discount to Telenor, which we believe is necessary to gain any material scale.
TeliaSonera (TLSN.ST) 20 22 March 2016
Figure 28: Telenor Norway VULA rate card vs retail fibre pricing Telenor VULA rate card Up-/downstream, Mbit/s Prioritised data (Mbit/s) Price/m (NOK) VULA Proff 10/10 2.5 385 VULA Proff 30/30 7.5 435 VULA Proff 60/60 15 585 VULA Proff 100/100 25 865 VULA Basis 10/10 N/A 295 VULA Basis 30/30 N/A 325 VULA Basis 60/60 N/A 385 VULA Basis 100/100 N/A 475 VULA Basis 500/500 N/A 800
Telenor retail rate card Up-/downstream, Mbit/s Technology Price/m (incl VAT) Price/m (excl VAT) 25/25 Fibre 449 359 50/50 Fibre 549 439 100/100 Fibre 649 519 500/500 Fibre 1049 839 Source: Company data
Completing the Nordic fixed and mobile footprint By acquiring TDC Telia would essentially complete its footprint in the Nordic and Baltic region becoming the number one or number two in each of the Nordic markets respectively and only missing a fixed line footprint in Latvia (2m pops). Plus Telia owns 49% in incumbent Lattelecom. While we believe there may not be a lot of cross border synergies, we believe there are other benefits, especially for a Swedish company. TeliaSonera generates just less than 50% of revenues in Sweden from the corporate segment, many customers of which we believe either travels on a regular basis or has offices in other Nordic or Baltic countries.
Figure 29: Nordic+Baltics market positioning Market Fixed* Mobile* position 1 2 3 4 1 2 3 4 Nordics Sweden Telia (incumbent) Telenor (ULL+fibre+cable) Com Hem (cable) Bredband2 (fibre wholesale) Telia Tele2 Telenor 3 SWE Norway Telenor (incumbent) TDC/Get (Cable) Altibox** (fibre) NextGenTel (ADSL+VDSL) Telenor Telia ICE N/A Denmark TDC (incumbent+cable) Stofa (cable) Telenor (ULL/BSA) Telia (ULL/BSA) TDC Telenor Telia 3 DK Finland Elisa (copper+cable+fibre) Telia (copper+cable+fibre) DNA (copper+cable+fibre) N/A Elisa Telia DNA N/A
Baltics Estonia Telia Telia Elisa Tele2 Lithuania Telia Tele2 Telia Bite Latvia Telia Tele2 Bite Source: Company data, Credit Suisse
As shown in Figure 30, Sweden is the only of the Nordic countries involved in material trade with all the other Nordic countries. Being the largest country and geographically centered in the region, we believe Telia is the most incentivised of Nordic telcos to have a strong presence in all markets.
TeliaSonera (TLSN.ST) 21 22 March 2016
Figure 30: Main trade flows between the Nordic and Baltic Sea region countries in 2014
Source: NORDREGIO, State of the Nordic region 2016 What could the remedies be? There is little overlap between Telia's and TDC's businesses except Denmark where overlap is high. In the event of an acquisition of TDC, Telia would in our view most likely to have to dispose its current Danish business and potentially part of TDC's fixed line network. TDC is one of the only incumbents in Europe that own both the main cable and copper infrastructure (TNOR also does in Norway). The Danish regulator has so far not forced a spin-off of either of TDC's network infrastructure assets. A change in control could trigger such an investigation as this is what happened in 2002 when Telia bought Sonera in Finland (Telia sold its cable business Com Hem as a remedy). Mobile consolidation Telia could likely have to sell its existing mobile business to get an acquisition of TDC approved by antitrust authorities. While we believe both Telenor and 3 DK would be willing buyers, the structure and remedies will be key. Furthermore, Telia and Telenor merged their networks in 2011, which could provide an additional obstacle if 3 DK were to acquire Telia's Danish business. With the network JV, Telia and Telenor committed to share CAPEX to 2022. Telenor's CAPEX spend in the last
TeliaSonera (TLSN.ST) 22 22 March 2016
2 years have been at a rate of around SEK500m per annum. Telia does not disclose Danish CAPEX but we believe it is very similar, mainly due to the network JV agreement. If Telia were to exit the JV, we believe it could continue to be liable for five years of investments, ie around SEK2.5bn SEK compared to a SEK3.5bn (SEK784m of EBITDA in 2017E) value of Telia's Danish business on 5x EV/EBITDA. So, on a net basis we believe proceeds could be as low as SEK1bn (less than 2x EBITDA). Fixed separation? With a change in control Telia could also be put under pressure to sell of one of TDC's fixed line businesses. This could be the cable network or the legacy copper network. TDC covers c.1.4m homes with its cable network, about 50% of total homes versus the full household coverage, see Figure 31 . TDC has rolled out little fibre so far, covering only 6% of households, most of which overlap with its cable network. If Telia had to choose we believe it would chose to keep the cable network, mainly due to the cheaper upgrade path to high speed broadband. TDC could then wholesale the copper network in areas that it doesn't cover with the cable network.
Figure 31: TDC network coverage of Danish households
TDC fixed network % of homes Households coverage Cable 50% 1,366 FTTH coverage 6% 166 Copper 100% 2759 Total homes passed 4,290 - % cable 31.8% Source: Company data, Credit Suisse esimates
We estimate the value of TDC's copper network to DKK8.6bn (SEK10.6bn), see Figure 32. We calculate this as follows:
■ Prior to the acquisition of GET, TDC had PP&E of DKK15.2bn, most of which we believe related to the Danish network assets. ■ We estimate the value of the mobile network basing the value per tower from recent tower acquisitions in Europe ranging from €100k per tower and upwards (eg Cellnex acquired sites from TEF at an average €111/site over the last 3 years). We assume a book value per site for TDC of €100k as it also include the active radio equipment which we assume offset the potential synergies priced in in the deal multiple. ■ This leaves a €12bn value for the fixed network assets including both cable and copper/fibre. We assume a 32/68 split of the value between the cable and copper/fibre network based on houses covered.
TeliaSonera (TLSN.ST) 23 22 March 2016
Figure 32: TDC copper/fibre network valuation
TDC fixed network valuation PP&E pre get (DKK'm) 15,166
Deduct: value of mobile network Mobile sites 3,500 Price (€'k/site) 100 Value of mobile network (€'m) 350 Value of mobile network (DKK'm) 2,609
Value of fixed network 12,557 % attributable to cable 32% % attributable to copper/fibre 68%
Value of copper network (DKK'm) 8,559 Value of copper network (SEK'm) 10,614 Source: Credit Suisse estimates, Company data
While proceeds from a sale of the copper network will reduce the size of the capital raise Telia potentially need, there is also an accompanying loss of revenues and EBITDA from fixed wholesale and the additional wholesale costs for Telia to continue to provide a service its existing customers on the copper network.
■ According to data from the Danish regulator TDC had 889k non cable broadband subscribers at the end of Q2 15 falling by c.15k per quarter. Already as a standalone company, TDC has highlighted a strategy to migrate customers from its copper network to cable. So, the number of customers on the copper network is likely to continue to decline at least at a similar rate as we have recently seen. ■ We further assume Telia would accelerate the migration to the cable network in the case of a forced sale of the copper network, with us assuming a 80k subscriber loss per year on the copper network. ■ After a close to 50% cut to the IP traffic wholesale rate in 2015 we assume only a marginal average decline of 1% per annum (similar to the announced 2016 cut). ■ As Telia would migrate customers to the cable network, the fixed wholesale costs would also reduce from DKK865m in 2018E (assuming a deal closing at the end of 2017E) to DKK660m in 2020E. In total, we estimate the loss of EBITDA to go from SEK2.0bn in 2018 to €1.8bn in 2020 versus a case where Telia does not have to spin off the copper network. As a result, the FCF per share accretion from a deal would reduce from 14.5% to 8.0% in 2020E if Telia were to spin off the copper network versus not, see Figure 33 .
TeliaSonera (TLSN.ST) 24 22 March 2016
Figure 33: EBITDA and FCF per share impact from a xDSL network spin-off
xDSL network spin-off 2016E 2017E 2018E 2019E 2020E Fixed wholesale revenues (DKK'm) 1,131 1,131 1,131 1,131 1,131 EBITDA (DKK'm) 743 746 749 752 755 Margin 65.7% 66.0% 66.2% 66.5% 66.7%
TDC xDSL broadband subs ('000) 800 740 660 580 500 - net adds -60 -60 -80 -80 -80 ULL rate (DKK/month) 57.6 57.0 56.4 55.9 55.3 - y/y -1.0% -1.0% -1.0% -1.0% IP traffic rate (DKK/month), 20Mbps 46.5 46.5 46.5 46.5 46.5 - y/y 0.0% 0.0% 0.0% 0.0% Broadband wholesale costs (DKK'm) 865 762 660
Net EBITDA impact (SEK'm) -2,001 -1,877 -1,754 EV/EBITDA 5.3
TLSN FCF per share standalone 2.33 2.38 2.45 NewCo FCF per share ex network spinoff 2.53 2.67 2.82 - accretion/dilution 8.5% 12.1% 14.5% NewCo FCF per share post network spinoff 2.32 2.49 2.65 - accretion/dilution -0.1% 4.6% 8.1% Source: Credit Suisse estimates
A TDC deal could be FCF accretive Financially a TDC acquisition would be accretive to TLSN FCF per share as TDC's cash flow yield is higher than the financing cost. However, the only overlapping asset Telia is likely to be able to keep is Norway and the majority of the accretion is rather by Telia acquiring an assets trading at >9% equity FCF yield, financing mainly through debt with an average interest cost of 3.75% on our estimates. A deal would be FCF per share accretive and also boost the FCF per share growth profile of Telia. For the deal structure we assume:
■ Telia pays a 30% premium to TDC' current share price of DKK31 implying a bid price of DKK40 per share and bid value of SEK40bn. ■ A 30/70 split of the price paid between share and cash ■ Telia sticks to a 2.5x upper limit to leverage (currently guiding for 2.0x, with a +/-0.5x deviation), having to make a SEK15bn capital raise with a total increase in the share count of 16% (cap raise+shares paid as part of deal).
TeliaSonera (TLSN.ST) 25 22 March 2016
Figure 34: Telia acquiring TDC: Potential deal structure
Deal structure Deal closing (end of year) 2017 Current share price 30.71 Price paid per TDC share (DKK) 39.9 - premium to current share price 30% Transaction equity value (SEK'm) 39,688
2017E EV/EBITDA paid 7.8
% paid in cash 70.0% Paid in cash (SEK'm) 22,404 % paid in shares 30% Paid in shares (SEK'm) 9,602 - shares issued 230.7
Net debt calculation (SEK'm) Telia net debt pre deal 2017E 47,785 TDC net debt pre deal 2017E 36,560
Sales proceeds: TDC Sweden -1,983 Telia Denmark -1,030
Cash paid in merger 22,404 Combined net debt pre capital increase 103,736 Combined 2017E EBITDA (post-disposals) 35,577 2017E Net debt/EBITDA - pre capital increase 2.9
Target net debt/EBITDA 2.5 Capital increase 14,793 Discount on new issued shares 10% Shares issued in capital increase ('m) 395 Shares issued as part of merger ('m) 231 - increase in share count 14.4%
Net debt post capital increase 88,943 Combined 2017E EBITDA (post-disposals) 35,577 2017E Net debt/EBITDA 2.5 Source: Credit Suisse estimates, Company data
Limited amount of synergies We believe Telia is likely to have to divest most overlapping assets (ie in Sweden and Denmark) assets to accommodate a takeover of TDC from antitrust standpoint, leaving only Norway as the only potential market with overlap. The merger would combine Telia's nationwide mobile network with GET covering c.1/4 of Norwegian households with its cable network. We have assumed synergies towards the lower end of other mobile and cable deals in Europe at c.6% of combined OPEX+CAPEX base with the majority of synergies on the OPEX site (see Figure 35 ). We believe this slightly lower than average synergy number is warranted due to GET only covering 25% of households.
TeliaSonera (TLSN.ST) 26 22 March 2016
Our synergy target, achieved in year five (assuming a closing end of 2017E) implied NPV of post-tax of SEK4.2bn (c.14% of TDC's current market cap). Figure 35: Telia and TDC: Potential Norwegian synergies
Synergies 2016E 2017E 2018E 2019E 2020E Norway TDC Norway OPEX (SEK'm) 2,293 2,181 2,209 2,237 2,266 Telia DK OPEX (SEK'm) 5,960 5,940 5,920 5,900 5,881 Combined OPEX Norway, SEK'm 8,253 8,121 8,129 8,137 8,147 Synergies, % of combined opex 2.0% 6.0% 7.0% Synergies, SEK'm 165.1 495.2 577.7 Tax rate on synergies 22% 22% 22% Synergies net of tax 128.2 385.6 450.6 Discount rate NPV of OPEX synergies 3,852
CAPEX Combined CAPEX Norway, SEK'm 1,757 Synergies, % 2.0% 3.0% 3.0% Synergies, SEK'm 35.1 52.7 52.7 Discount rate NPV of CAPEX synergies 369 Source: Credit Suisse estimates
We assume no cross border synergies form Telia being bigger, nor do we assume any revenue synergies in particular form the potential of market repair in Denmark (Telia's business sold to an existing player). Market repair in Danish mobile could drive additional upside to our forecasts. Due to the slower revenue growth at TDC standalone and lack of revenue synergies, the combined 2017-20E revenue CAGR is set to be slightly slower than Telia's standalone growth. Due to the synergies however, the combined EBITDA growth profile looks slightly better for the combined entity than for Telia standalone (Figure 36). Telia and TDC combined would grow EBITDA by 1.3% 2017-20E CAGR versus the 1.0% for Telia standalone and TDC 0.4%. Acquiring TDC would also mean an improvement to Telia's FCF growth from 2.7% 2017E- 2020E CAGR standalone to 5.1% after a combination with TDC over the same time period. This implies an 8-15% FCF per share accretion over 2018-2020E with a deal being accretive from day one (pre integration costs). This is mainly driven by the fact that Telia would acquire an asset at a c.9% FCF yield financing it mainly through debt with a materially lower cost associated with it. Even excluding synergies, a deal would be 7-10% accretive to FCF per share. Essentially, a deal acquiring TDC would further give TeliaSonera room to grow its dividend from the announced floor in 2016E of SEK2.0 per share. Telia has set a dividend policy of at least 80% of FCF, whilst on our forecasts on a standalone Telia basis there is no clear room for Telia to raise the dividend. Rather the opposite, on our FCF forecasts for Telia standalone, SEK2.0 per share implies 84-88% of 2017-2018E FCF. On a combined basis however, 80% of FCF per share would imply a small growth in DPS from 2018E (c.1%) which could be higher if Telia went above 80% pay out of FCF. If Telia would be willing to take its leverage higher, the FCF per share accretion would materially increase as Telia would have to issue fewer new share. If Telia would be willing to go to 3.0x EV/EBITDA, FCF per share generation would go to 14-20% over 2018-
TeliaSonera (TLSN.ST) 27 22 March 2016
2020E. It would take a little more than three years for Telia to bring leverage down to 2.5x however (unless taking a dividend holiday), so we view this a fairly unlikely. Figure 36: Telia pre- and post a potential TDC deal
Financials 2015A 2016E 2017E 2018E 2019E 2020E 2017-20 CAGR Revenues (consolidated) Telia (SEK'm) 85,979 85,455 85,457 85,555 85,762 0.1% TDC (DKK'm) 24,367 23,537 23,226 23,096 23,043 23,069 -0.2% Combined (SEK'm) 105,308 105,185 105,252 105,490 0.1%
EBITDA (consolidated) Telia (SEK'm) 25,543 25,821 26,048 26,320 26,606 1.0% TDC (DKK'm) 9,809 9,022 8,821 8,791 8,828 8,933 0.4% Combined (SEK'm) 35,577 35,911 36,536 37,034 1.3%
FCF per share (consolidated) Telia (SEK) 1.62 2.26 2.33 2.38 2.45 2.7% TDC (DKK) 4.09 2.42 2.68 2.69 2.82 3.13 5.4% Combined (SEK) 2.41 2.52 2.67 2.80 5.1% - accretion/dilution 8.4% 12.1% 14.5% Source: Credit Suisse estimates, Company data
On our estimates TeliaSonera (standalone post a Eurasia disposal) is currently trading on 7.0% proportionate (proportionate contribution from associates) 2018E equity FCF yield on a standalone basis. The same FCF yield post a TDC acquisition would warrant a SEK43.5 share price. However, post a potential acquisition of TDC we see scope for Telia shares to rerate further as:
■ Telia's FCF per share 2017-20E CAGR would improve from 2.7% to 5.1% providing better dividend coverage and potential for dividends to grow. ■ The risk profile of the company would improve once a sale of Eurasia is actually complete as there is current some uncertainty around the sales proceeds of the Eurasian business and potential settlement costs. So there may be even further upside post a deal, in our view. On 2018E proportionate EV/EBITDA, Telia is currently trading at 5.6x. A similar multiple post and acquisition would warrant a c.SEK40 share price. The EBITDA growth improvement from acquiring TDC is more limited than FCF per share growth. However, we still see some room for a rerating owing to less risk relating to the Eurasia disposal and settlement and uncertainty around future strategy.
TeliaSonera (TLSN.ST) 28 22 March 2016
Figure 37: Telia post TDC valuation analysis
2018E EV/EBITDA 5.0x 5.5x 6.0x 6.5x 7.0x 7.5x EBITDA consolidated 35,911 35,911 35,911 35,911 35,911 35,911 Proportionate EBITDA from associates 9,489 9,489 9,489 9,489 9,489 9,489 EBITDA, proportionate 45,400 45,400 45,400 45,400 45,400 45,400 Implied EV 226,999 249,699 272,399 295,099 317,798 340,498 Net debt, consolidated 86,358 86,358 86,358 86,358 86,358 86,358 Proportionate net debt from associates 1,776 1,776 1,776 1,776 1,776 1,776 Net debt, proportionate 88,134 88,134 88,134 88,134 88,134 88,134 Add back: Cumulative dividends paid 30,311 30,311 30,311 30,311 30,311 30,311 Equity value 169,176 191,876 214,576 237,276 259,976 282,676 Price per share, SEK 34 39 43 48 52 57
2018E FCF yield 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% FCF per share*, consolidated 2.28 2.28 2.28 2.28 2.28 2.28 Proportionate FCF per share from associates 0.77 0.77 0.77 0.77 0.77 0.77 FCF per share 3.05 3.05 3.05 3.05 3.05 3.05 Price per share 40.6 43.5 46.9 50.8 55.4 60.9 Source: Credit Suisse estimates What other strategic moves could Telia consider? On its 2014 CMD, Telia highlighted a strategy to become a "New Generation Telco" through a larger focus on applications and integrated services, see Figure 38. As part of this, Telia acquired a 1.4% stake in Spotify for $115m in 2015. We do not rule out Telia making further bolt-on acquisitions, however we transformational deals are less with near term focus on completing its core telco footprint.
Figure 38: TeliaSonera to become a New Generation Telco
Source: Company data
TeliaSonera (TLSN.ST) 29 22 March 2016
Swedish fixed line outlook remains mixed As Telia is exiting its Eurasian assets, the Swedish business is materially increasing in importance contributing 56% of the consolidated EBITDA in 2016E. Over the last few quarters to Q4 15, Swedish fixed line has been a particular drag on Swedish service revenues (see Figure 39). This is mainly due to heavy fixed telephony line loss with TeliaSonera fixed telephony line loss of 6-8% y/y in 2014-2015. However, without the one-time fibre installation growth accelerating, trends would have been even worse. Revenues trends in the core retail segment (see Figure 40) would still be improving somewhat, albeit declining by c3% y/y in Q4 15..
Figure 39: TeliaSonera Sweden service revenue trends
4%
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Telia mobile service revenues y/y Telia fixed service revenues y/y Total Telia Sweden service revenues y/y
Company data
Figure 40: Telia fixed telephony, broadband and TV revenues y/y
0.0% Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 -1.0%
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TeliaSonera (TLSN.ST) 30 22 March 2016
The improvement in trends in Q3 and Q4 2015 were mainly driven by an acceleration in broadband ARPU growth (more fibre uptake) and TV ARPU as Telia raised pricing. We are furthermore seeing some signs of improvement on fixed broadband as: ■ Fixed prices have started to go up ■ Potential for market subscriber growth to accelerate In addition, Telia is set to benefit from fibre installation revenues to continue to grow in 2016 over 2015 as Telia accelerates the roll-out. These revenues are however likely to start to tail off from 2017 and more so in 2018 due to less new builds. The magnitude of the revenue losses will depend on how successfully Telia upsell homes passed that did not connect. Fibre installation revenues had a 2pp positive impact on Swedish fixed service revenue trends in 2015 and made up 6% of Swedish fixed line revenues and 3% of total Swedish revenues. The outlook for voice line loss remains weak however, with 790k of Telia's 1.9m voice lines on our estimates being voice only. So, line loss is set to remain high and we forecast Telia to continue to lose 8-9% of voice line each year for the next 4 years. Swedish fixed broadband pricing increasing While the move in Swedish mobile prices have been mainly negative over the last 12 months, pricing trends in Swedish fixed have improved. All three of the main Swedish fixed line operators raised pricing during 2015. So, pricing seems to be on a generally upward trend in Swedish fixed line. Telia price increases: ■ In early March 2015, Telia raised the pricing on its Large TV bundle from SEK229/month to SEK250/month for new and existing customers
■ In August 2015, Telia raised the price of its Medium TV Bundle from SEK149/month to SEK180/month also for new and existing customers
■ Telia also raised the paper billing fee from SEK19/month to SEK29/month in the middle of the year Telia did not touch its fixed broadband pricing during 2015 Telenor price increases: In H2 15:
■ Telenor scrapped the 10Mbps entry level fibre/cable broadband bundle
■ Telenor raised pricing on its 24Mbps ADSL broadband bundle from SEK389/month to SEK409/month and the 60Mbps VDSL bundle from SEK439/month to SEK459/month.
■ Telenor introduced a new 40Mbps VDSL product, priced at SEK459/month Com Hem price increases: Most recently Com Hem announced back book increases double the size of the last year's price increase. The company also raised front book pricing on its entry level 50Mbps and the 250Mbps broadband packages by SEK30/month, 7% and 5% respectively. After the price increases from competitors, Telia remains at 10-25% premium (see Figure 49 for comparison and Figure 42 to Figure 44 for more details), although it has narrowed. Telia is now also pricing its xDSL fixed broadband at a premium to its fibre product, even before taking into account the fact that xDSL broadband customers are obliged to take VoIP on top for SEK80/month (incl VAT)
TeliaSonera (TLSN.ST) 31 22 March 2016
Figure 41: Sweden fixed broadband price comparison (SEK/m, incl VAT) ComHem Telia xDSL* Telia Fibre TNOR xDSL TNOR cable/fibre 2Mbit/s 269 8Mbit/s 329 10Mbit/s 329 299 24Mbit/s 389 30Mbit/s 359 50Mbit/s 319 60Mbit/s 419 439 100Mbit/s 349 379 369 250Mbit/s 449 499 399 500Mbit/s 599 1Gbit/s 899 999 899 Source: Company data
Figure 42: Telia Sweden fixed broadband pricing Broadband Download speed SEK/month SEK/month (ex VAT) Technology Comment 10Mbit/s 329 274 Fibre SEK199/month for 3 months 100Mbit/s 379 316 Fibre SEK199/month for 3 months 250Mbit/s 499 416 Fibre SEK199/month for 3 months 1Gbit/s 999 833 Fibre SEK199/month for 3 months
1.5-2Mbit/s 269* 224 ADSL SEK199/month for 3 months 6-8Mbit/s 329* 274 ADSL SEK199/month for 3 months 12-30Mbit/s 359* 299 ADSL SEK199/month for 3 months 30-60Mbit/s 419* 349 ADSL SEK199/month for 3 months
Broadband with telephony 1.5-2Mbit/s 349 291 ADSL 6-8Mbit/s 409 341 ADSL 12-30Mbit/s 439 366 ADSL 30-60Mbit/s 499 416 ADSL Source: Company data, *ex line rental, line rental comes on top SEK89/month
Figure 43: Com Hem fixed broadband pricing Broadband Download speed SEK/month Comment 50Mbit/s 319 100Mbit/s 349 SKr199/month first 12months 250Mbit/s 449 SKr299/month first 12months 500Mbit/s 599 SKr199/month first 3months 1Gbit/s 899 SKr0/month first 3months Source: Company data
Figure 44: Bredbandsbolaget (Telenor) fixed broadband pricing Broadband Download speed SEK/month Comment Technology 24Mbit/s 409 SKr249/month first 6months ADSL 40Mbit/s 459 SKr249/month first 6months VDSL 60Mbit/s 459 SKr249/month first 6months VDSL 100Mbit/s 369 SKr249/month first 6months Fibre/Cable 250Mbit/s 399 SKr249/month first 6months Fibre/Cable 500Mbit/s 599 Fibre/Cable 1Gbit/s 899 Fibre Source: Company data
TeliaSonera (TLSN.ST) 32 22 March 2016
Scope for strong fixed broadband market growth Mobile broadband substitution becoming less of a risk With very strong mobile network quality in Sweden, both on 3G (licenses were awarded with strict roll-out requirements) and 4G (Sweden was the first country in the world to launch), mobile substitution of fixed broadband has been relatively high in Sweden and continued to be viewed as one of the main risks by investors. As a result, fixed broadband penetration in Sweden is among the lowest in Western Europe (see Figure 45), only higher than Italy and Austria.
Figure 45: European fixed broadband penetration 105.0% 99.8% 100% 92.9% 90.1% 89.9% 88.3% 90% 84.0% 83.7% 82.4% 77.9% 77.8% 80% 76.1% 74.7% 70.9% 70% 59.5% 60%
50%
40%
30%
20%
10%
0% France Swiss Norway UK Neths DenmarkGreece Belgium Europe PortugalGermany Spain Sweden Austria Italy
2Q15 3Q15 4Q15
Source: Company data, Credit Suisse
While Sweden's fixed broadband market growth is currently only in-line with the rest of Europe with penetration increasing just less than 3pp y/y in Q4 15 (see Figure 46 ), we see scope for an acceleration as consumers increasingly switch from mobile broadband back to fixed. Figure 46: Fixed broadband penetration increase (y/y)
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0% Portugal Swiss France Greece UK Belgium Germany Austria Europe Sweden Italy Norway Denmark Spain Neths 2Q15 3Q15 4Q15
Source: Company data, Credit Suisse
TeliaSonera (TLSN.ST) 33 22 March 2016
A consumer survey of internet usage in Sweden conducted by the Swedish telecommunications regulator (PTS) in 2015, implies that consumers are again starting to favour fixed over mobile broadband. For the first time, the number of consumers having a mobile broadband connection who use it as their main way of connecting to the internet declined in 2015 after having been on a steady growth path previously – see Figure 47.
Figure 47: What technology do you use mainly to connect to the internet?
40% 35% 35%
30% 27%
25%
20% 17%
15% 12% 10% 4% 5% 4% 1% 0% Fiber of ADSL/VDSL Mobile Cable No response Don't know Other Dial-up No internet fiberLAN broadband connection
2009 2011 2013 2015
Source: PTS 2015
The key factors when deciding which technology to go for were: no limits on data usage, low cost and high bandwidth, according to the survey. No limits on data usage was by far the most common, overtaking cost as the most important factor in the previous surveys.
Figure 48: Why have your household chosen the internet connection you are currently using?
30% 28%
25% 22% 21% 20% 20% 18%
15% 12% 11% 10% 6% 5% 0% 0% Do not want any Want a low cost Using services that Can't get anything Got a bundle deal Do not know Other Want to be able to No answer limits on data usage connection require higher else where broadband use the same bandwidth was included broadband contract outside of home
2009 2011 2013 2015
Source: PTS 2015
Only 11% of respondents in the PTS survey stated they would consider switching from fixed to mobile broadband. This number has been declining steadily over the last five years. Again, access to unlimited usage is the most important reason not to go mobile only.
TeliaSonera (TLSN.ST) 34 22 March 2016
Consumers in Sweden increasingly value the higher bandwidth and unlimited data usage that comes with fixed broadband. This supports fixed broadband operators pricing power, and a move back to fixed broadband penetration, in our view. Figure 49: Would you consider switching from fixed broadband to mobile only broadband at home?
35%
29% 30%
25%
20% 19% 19% 17% 16% 15% 15% 11% 11% 10% 6% 5%
0% No, because the No, for other No, because I think No, because I am Do not know No, concerned if it Yes, I could do it Yes, and I have No, have no cell bandwidth is reasons it will be too concerned the will actually work already done so coverage throttled if I am expensive connection might technically using over a go down certain amount of data
2009 2011 2013 2015
Source: PTS 2015
Broadband penetration to increase The Swedish market catching up with the rest of Europe at around 85% fixed broadband penetration implies the Swedish market growing by 522k subscribers. We forecast Telia broadband adds to accelerate to 50k per annum (from 31k in 2015) on the back of stronger market growth and Telia benefitting from a larger fibre footprint. Telia currently has a 38% fixed broadband market share in Sweden (and has been stable over the last few years), assuming Sweden reaches 85% fixed broadband penetration over the next four years implies Telia merely retains its current market share. We forecast modest broadband ARPU growth as customers migrate to higher speeds. In addition we see potential for Telia to raise fibre broadband pricing as Com Hem and Telenor both have raised front book pricing and Com Hem back book pricing over the last year. Overall we forecast broadband revenue growth to accelerate to +7.3% in 2016E from 6.2% in 2015 and continue to grow at 6-7% per annum in 2017-2019E.
Figure 50: Telia Sweden fixed broadband forecasts Sweden 2013 2014 Q1 15 Q2 15 Q3 15 Q4 15 2015 2016E 2017E 2018E 2019E Broadband subs ('000) 1,208 1,275 1,287 1,295 1,296 1,306 1,306 1,356 1,406 1,456 1,506 - net adds 33 67 12 8 1 10 31 50 50 50 50 Implied revenue per sub (SEK/month) 261.2 265.1 266.3 269.8 272.7 274.3 270.8 281.9 290.4 296.2 302.1 - change y/y 2.6% 1.5% 0.6% 1.1% 2.6% 4.4% 2.2% 4.1% 3.0% 2.0% 2.0% Broadband service revs (SEK'm) 3,732 3,953 1,023 1,045 1,060 1,070 4,198 4,503 4,813 5,087 5,370 - change y/y 5.3% 5.9% 6.0% 5.6% 6.0% 7.1% 6.2% 7.3% 6.9% 5.7% 5.6% Source: Company data, Credit Suisse estimates Fibre installations to continue to support revenues near term TeliaSonera is one of few incumbents in Europe that passes on the fibre installation cost to consumers in SDUs. The fee Telia charges consumers to get fibre installed in SDUs is
TeliaSonera (TLSN.ST) 35 22 March 2016
SEK20-25k (around €2k), which is then booked under service revenues and has driven much of the improvement in fixed service revenue trends over the last two quarters. Over the last year Telia has also raised the price of fibre installation (from SEK15-20k). The fibre installation revenues have accelerated after Telia announced its accelerated fibre roll-out plan at the CMD in 2014. As a result of the ramp-up in fibre installations revenues, Telia grew its domestic fixed revenues at the third fastest rate among the European incumbents (after BT and TEF) in Q4 15. Telia's fixed service revenue trends have improved did indeed improve in Q3 and Q4 15 even without the fibre installation revenues, however were still declining by c.1.5% y/y in Q4 versus headline growth of c.3.5%, Figure 51. Fibre installations increased by SEK412m in 2015 vs 2014 with growth accelerating throughout the year (Figure 52) reaching total fibre installation revenues of SEK1bn (6% of fixed service revenues) in 2015. As the fibre installation revenues are indeed a one off payment, we question the sustainability as beyond the peak year of roll-out in 2016E.
Figure 51: TeliaSonera fixed service rebounding excluding fibre installation but at a slower rate and is still declining
4.0%
3.0%
2.0%
1.0%
0.0% Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 -1.0%
-2.0%
-3.0%
-4.0%
-5.0%
Fixed service revenues . y/y Fixed service revenues ex fibre installations, y/y
Source: Company data, Credit Suisse estimates, Note: We adjust for a SEK330m annual impact from the acquisition of Zitius from May 2014
Figure 52: Telia fibre installation revenues accelerating in 2015
500
450
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250 SEK'm 200
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50
0 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15
Fibre installations revenues
Source: Company data, Credit Suisse
Telia has said it plans to accelerate the fibre roll-out in 2016E and highlighting demand is currently bigger than supply. The main bottleneck in rolling out faster are suppliers of equipment and manpower.
TeliaSonera (TLSN.ST) 36 22 March 2016
In 2015 Telia installed fibre in 55k SDUs (ex SDUs connected on group agreements) with an average revenue per home of SEK19k (ex VAT). Telia has said around 50% of new homes passed in the year opted in, implying c.110k SDUs passed in 2015. By the end of 2015, Telia had reached a fibre coverage of 1.3m, on track to hit its target of 1.9m by the end of 2018. Of these 1.3m homes passed by fibre 230k are SDUs. Telia has not guided for the end number of SDUs the company intends to cover in 2018. However, we forecast Telia will continue to roll-out to just over 100k homes per year over the next three years with a peak at 120k in 2016E. Installation revenues per home has been broadly flat at SEK19k per home, so this implies continued growth in 2016E in fibre installation revenues. However growth should slow down from 2017E as the roll-out of new homes slows. So, the fibre installation revenues will continue to offset some of the drag on fixed line revenues in 2016E but we expect a decline again from 2017E.
Figure 53: Telia fibre roll-out
2013 2014 2015 2016E 2017E 2018E 2019E New homes passed 72 80 120 109 100 30 - take rate 50.0% 50.0% 55.0% 55.0% 55.0% Homes installed (SDU villas) 36 55 66 60 55 50 SEK/home (ex 25% VAT) 17,222 18,764 19,000 19,000 19,000 19,000 Fibre installation revs ('m) 369 620 1,032 1,254 1,140 1,045 950 - y/y 66.5% 21.5% -9.1% -8.3% -9.1% Source: Company data, Credit Suisse estimates Fixed line loss to remain a substantial drag on revenues Fixed line voice line loss and pressure on voice ARPU has been the main drag on Telia Sweden fixed line revenues over the last few years falling by SEK700-800m per annum providing a >4% drag on Swedish fixed service revenues. TeliaSonera's voice line loss has slightly accelerated over the last two years from -6% in 2013 to -8% in 2015. This is not just a base effect as but Telia lost 158k voice lines in 2015 vs 138k in 2013. Part of this line loss is fibre customers not having to take a fixed telephony line, so as Telia upsells fibre, it is also driving line loss. In addition, and likely a bigger driver, Telia still has a lot of voice only lines. In the Consumer (B2C) segment, Telia is saying c.5% of fibre broadband customers take a PSTN line and 25% of xDSL customers. This total only 178k of the 773k Consumer PSTN lines belong to customers who also take a broadband subscription, leaving close to 600k as voice only subscribers (see Figure 54). These voice only subscribers may take a broadband subscription from other broadband providers (eg Com Hem, Telenor or other independent fibre broadband providers). However, these customers do not need to take a PSTN subscription and represent a high risk of cutting their subscription at some point. Telia raised pricing on line rental in 2014, however, not in 2015. The company has said it is continuously reviewing its fixed line pricing. We have not assumed a further price increase in our forecasts, so Telia going ahead raising prices would have a positive impact on our forecasts.
TeliaSonera (TLSN.ST) 37 22 March 2016
Figure 54: Telia voice only Consumer lines
Consumer PSTN lines 773
Consumer fibre lines 410 Consumer xDSL lines 630 Consumer broadband lines 1040
% of xDSL subs taking PSTN 25% % of fibre subs taking PSTN 5% % of total broadband subs taking PSTN 17% Fixed broadband subs PSTN 178
Consumer PSTN lines 595 Source: Credit Suisse estimates
Telia's own xDSL broadband customers need to take a fixed telephony line, either VoIP or PSTN. However this is not needed with a fibre broadband connection, and currently only 60% of fibre broadband customers take a fixed telephony line (5% PSTN and 55% VoIP). So, Telia migrating customers to fibre has driven some of the PSTN line loss and is likely to continue to do so as the company accelerates its fibre roll-out. We estimate Telia added just over 100k fibre broadband subs in 2015, implying around 40k of the voice line loss in the year was driven by fibre migration. On our estimates, Telia has at least 790k total voice only line in Consumer and Business (assuming all business broadband customers take fixed voice). We expect the number of fixed only lines to continue to decline as most mobile subscriptions include unlimited voice and households can get the fixed telephony number to the mobile phone. Furthermore looking at Denmark which one of the markets that are the furthest ahead on line loss, TDC is reporting only 205k voice only RGUs, representing c.8% of total Danish households with the decline in number of lines continues at a slightly slowing rate. Telia's c.600k B2C voice only lines represents 13% of Swedish households, and the loss of voice only lines to continue at only a slightly slowing rate. We set out our forecasts of Telia line loss in Figure 55.
■ We expect loss of voice only lines to slow by 10k per year from the 158k on our estimate in 2015. This implies 380k loss of voice only lines (B2C+B2B) between 2016- 2019 and Telia voice only lines representing 7% of households by the end of 2019E. ■ An acceleration in migration of customers to fibre is set to drive further line loss. Again fibre broadband subscribers do not need to take a fixed voice line while xDSL customers do. We assume a take rate of fixed voice among fibre customers in line with the current 60%. ■ This implies voice line loss to accelerate further in % terms but slow somewhat in absolute terms.
TeliaSonera (TLSN.ST) 38 22 March 2016
Figure 55: Telia Sweden fixed voice line loss 2014 2015 2016E 2017E 2018E 2019E Total fixed voice lines 2,054 1,896 1,742 1,602 1,478 1,368 Total fixed voice line loss -155 -158 -159 -149 -139 -129 - y/y -7.0% -7.7% -8.4% -8.6% -8.8% -8.9%
Line loss breakdown Telia total voice only lines 953 790 685 595 520 460 Loss of voice only lines -132 -120 -110 -100 -90 -80
Fibre migrations 60 100 130 130 130 130 % of xDSL subs taking fixed voice 95% 95% 95% 95% 95% 95% % of fibre subs taking fixed voice 60% 60% 60% 60% 60% 60% Line loss from fibre migrations -23 -38 -49 -49 -49 -49 Source: Company data, Credit Suisse estimates
Fixed telephony ARPU is further set to come under pressure from a continued mix shift towards VoIP from PSTN as VoIP line rental is about half that of PSTN (VoIP SEK80/month vs PSTN SEK165/m, incl VAT). As a result we forecast Voice line rental ARPU to continue to fall by 3-4% per year in 2016-2019E. Overage ARPU per voice line has come down by close to 1/3 over since 2013. We forecast a continued decline although at a slowing rate as the base gets smaller and the voice customers left are likely customers who actually use their voice line. Overall, we forecast Telia to continue to lose a material amount of voice revenues each year, as line loss remains high. We forecast the decline in fixed voice revenues to only marginally slow in 2016E but slow at a faster rate from 2017E mainly driven by a slowdown in the decline in voice overage ARPU. By 2019E we forecast the revenue drag from loss of fixed voice revenues to have slowed to SEK343m from SEK669m in 2015, see Figure 56.
TeliaSonera (TLSN.ST) 39 22 March 2016
Figure 56: Telia fixed telephony revenue forecast Fixed 2013 2014 2015 2016E 2017E 2018E 2019E PSTN subs 1,611 1,357 1,159 980 816 667 528 - net adds (249) (254) (198) (179) (164) (149) (139) VoIP subs 598 697 737 757 772 782 792 - net adds 111 99 40 20 15 10 10 Retail telephony subs 2,209 2,054 1,896 1,737 1,588 1,449 1,320 - net adds (138) (155) (158) (159) (149) (139) (129) - change y/y -5.9% -7.0% -7.7% -8.4% -8.6% -8.8% -8.9%
PSTN line rental (SEK165/m inc 25% VAT) 116 132 132 132 132 132 132 - y/y 13.7% -0.1% 0.1% 0.0% 0.0% 0.0% PSTN line rental revenues 2,418 2,347 1,983 1,695 1,422 1,175 946 - y/y -3.0% -15.5% -14.5% -16.1% -17.4% -19.4% VoIP line rental (SEK80/m inc 25% VAT) 64 64 64 64 64 64 64 - y/y 0.3% 0.0% -0.1% 0.0% 0.0% 0.0% VoIP line rental revenues 413 501 553 574 587 597 604 - y/y 21.4% 10.5% 3.7% 2.3% 1.6% 1.3%
Average line rental per line 104 111 107 104 101 97 93 - y/y 7.3% -3.7% -2.9% -3.2% -3.5% -4.0% Line rental revenues 2,831 2,847 2,536 2,268 2,010 1,771 1,551 - y/y 0.6% -10.9% -10.6% -11.4% -11.9% -12.4%
Overage revenues per line (PSTN+VoIP) 106 86 72 61 54 50 48 - y/y -18.6% -16.8% -15.0% -12.0% -6.0% -5.0% Overage revenues (SEK'm) 2,888 2,203 1,695 1,327 1,069 918 795 - y/y -23.7% -23.1% -21.7% -19.5% -14.1% -13.4%
Implied revenue per voice line 209.5 197.3 178.7 164.9 154.3 147.6 141.2 Implied revenue per voice line y/y -7.2% -5.8% -9.4% -7.7% -6.4% -4.4% -4.3% Telephony service revs 5,719 5,050 4,231 3,596 3,078 2,689 2,346 Telia retail voice revenues, y/y -13.4% -11.7% -16.2% -15.0% -14.4% -12.7% -12.8% Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 40 22 March 2016
Fixed voice line loss and fibre installation revenues to broadly net off The net impact on revenues from fixed line loss and PSTN line loss is set to be broadly flat with a slightly smaller drag on revenues in 2016E. However, in 2017E, trends are set to worsen again as the improvement in fixed telephony revenues is not enough to offset fibre installation revenues starting to decline. The drag on EBITDA is smaller than on revenues due to the lower margin on fibre installation (c.50%) than fixed voice (c80%).
Figure 57: Net revenue and EBITDA impact from fixed line loss and fibre installation Q1 14 Q2 14 Q3 14 Q4 14 2014 Q1 15 Q2 15 Q3 15 Q4 15 2015 2016E 2017E 2018E Fibre installation revenues 22 166 213 219 620 52 250 300 430 1,032 1,254 1,140 1,045 Fixed voice revenues 1,341 1,308 1,209 1,193 5,050 1,135 1,066 1,025 1,005 4,231 3,596 3,078 2,689
Delta y/y Fibre installation revenues 4 90 109 48 251 30 84 87 211 412 222 -114 -95 Fixed voice revenues y/y -172 -149 -173 -174 -669 -206 -242 -183 -189 -819 -635 -517 -389 Net impact -168 -59 -64 -126 -418 -176 -158 -96 22 -407 -413 -631 -484
Margin Fibre installation revenues 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% Fixed voice 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80%
EBITDA impact Fibre installation revenues 2 45 55 24 126 15 42 44 106 206 111 -57 -48 Fixed voice -138 -119 -139 -139 -535 -165 -193 -147 -151 -655 -508 -414 -312 Net impact -136 -74 -84 -115 -409 -150 -151 -103 -45 -449 -397 -471 -359 Drag on Swedish EBITDA -3.7% -2.1% -2.2% -3.3% -2.8% -4.2% -4.2% -2.8% -1.3% -3.1% -2.8% -3.3% -2.5% Source: Company data, Credit Suisse estimates Swedish fixed revenues We forecast fixed service revenue growth to slow from the +3.3% y/y in Q4 15 to +0.4% y/y in 2016 as:
■ The growth in fibre installation revenues slows to +21.5% in 2016 vs +66.5% in 2015 (+96% y/y in Q4 15), ■ the decline in fixed telephony revenues only slow marginally to -15% from -16% in 2015 ■ comps are getting tougher as Telia lapses the increase in paper billing fee put through in Q2 15 and customers are migrating to e-billing as a result ■ Telia lapses the price hikes on TV in Q3-Q4 15 The acceleration in fixed broadband and TV revenue growth is not enough to offset these factors.
Figure 58: Telia Sweden fixed revenue forecasts Sweden 2012 2013 2014 Q1 15 Q2 15 Q3 15 Q4 15 2015 2016E 2017E 2018E 2019E Telephony 6,601 5,719 5,050 1,135 1,066 1,025 1,005 4,231 3,596 3,078 2,689 2,346 Broadband 3,545 3,732 3,953 1,023 1,045 1,060 1,070 4,198 4,503 4,813 5,087 5,370 TV 1,021 1,162 1,283 337 346 362 376 1,421 1,618 1,789 1,936 2,070 Business solutions 3,691 3,466 3,227 797 791 759 811 3,159 3,065 3,003 2,973 2,944 - growth y/y -6.1% -6.9% -1.4% -3.2% -0.1% -3.4% -2.1% -3.0% -2.0% -1.0% -1.0% Other fixed service revenues 3,536 3,906 4,265 976 1,187 1,210 1,412 4,786 5,083 5,007 4,951 4,895 - growth y/y 10.5% 9.2% 7.8% 11.9% 6.8% 21.2% 12.2% 6.2% -1.5% -1.1% -1.1% Fixed service revenues 18,394 17,985 17,778 4,268 4,435 4,417 4,675 17,795 17,864 17,691 17,636 17,624 - growth y/y -2.2% -1.1% -1.6% -1.3% -0.1% 3.3% 0.1% 0.4% -1.0% -0.3% -0.1% Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 41 22 March 2016
Swedish mobile trends under pressure Since the launch of Tele2's big buckets om February 2015, growth in the Swedish market notably slowed down (see Figure 59). After having grown consistently at around 4% y/y for 5 quarters, growth has gradually slowed to just 1.6% y/y in Q4 15. After a 2pp sequential slowdown in growth in Q2 15 (to 2.2% y/y) the market rebounded in Q3 15.This bounce turned out to be driven more by higher roaming revenues and data top-ups still benefitting the operators and growth slowed again in Q4 15 to 1.6% y/y.Tele2 and 3 Sweden used to grow the fastest, and have also slowed down the most.
Figure 59: Swedish mobile end user service revenue trends
25%
20%
15%
10%
5%
0% 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15
-5%
Tele2 TLSN 3 Sweden TNOR Market
Source: Company data, Credit Suisse
■ For Telia, the slowdown in Q4 15 was driven by a slowdown in ASPU (average sales per user) growth and an acceleration in the decline of subscribers (see Figure 60). ■ Telia lost subscribers y/y mainly in the low end segment on its sub-brand Halebop to Comviq (Tele2) and to a lesser extent loss of B2B customers. Since the doubling of data bundles, Telia has seen a steady improvement of the take rate on higher end tariffs with:
■ 30% of new customers taking the 12GB bundle in Q4 15, a big step-up from 20% in Q3 15 and 11% in Q3 14 (the bundle only included 6GB in Q3 15) and 15% in Q2 15 At the same time Telia has seen big decrease in share of new subscribers customers taking the entry level 0.5GB bundle:
■ 11% of new customers took the entry level bundle (0.5GB) in Q4 15 vs 14% in Q3 15 and 20% in Q3 14. Telia raised pricing from SEK199/month to SEK229/month on the entry level bundle in June, which seems to have helped these trends. However, despite this positive change in customer uptake and loss of low ASPU Halebop subscribers, blended ASPU growth slowed, a sign neither of the positive effect were big enough to offset the drop in top-up revenues. As we have highlighted in previous research (see Tele2: Downgrade to Underperform, 6 March 2015), we expected the Swedish operators to see a near term benefit from upgrading customers to the larger data bundles (with the bigger bundles customers were incentivised to upgrade as they got more data for the same cost to upgrade) but growth to slow (or even decline) as there would be less need for customers to upgrade further or buy data top-up when on 12-20GB bundles.
TeliaSonera (TLSN.ST) 42 22 March 2016
The positive impact from migrating customers to larger data bundles have been somewhat smaller than we originally anticipated, indeed with average B2C data usage on smartphones there seem to be some time before customers going to 12GB plans need to upgrade further, or add on data top-ups. Figure 60: Telia Sweden mobile growth trends
25%
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0% Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15
-5%
TLSN ASPU growth y/y TLSN average subscriber growth y/y TLSN end user service revenue growth
Source: Company data, Credit Suisse
B2B remains challenging In addition to pressure on B2C from larger data bundles, Telia and the other operators in Sweden have highlighted increased competitive pressure in the B2B segment, mainly on larger corporates and public sector service contracts.
■ Telia is pointing to TDC being the most aggressive on B2B contracts. While TDC has put its Swedish business up for sale but we expect competition to continue to be tough and see continued pressure from public sector entities continuing to cut back on spending. ■ TDC moved from the Tele2 mobile network to Telia at the end of 2015, so Telia will get some of the revenues back on wholesale revenues. Forecast Telia end user service revenues to decline in 2016 We forecast customer billed revenues to decline by 1.6% and mobile service revenues to decline by 0.6% in 2016 (vs +1.2% in Q4 15) as and:
■ Continued competitive pressure on the low end of the B2C market ■ A negative impact on the high end negatively impacted from larger data bundles driving less upgrades to larger data bundles and data top-ups ■ 4G adoption slowing with as 4G penetration is now at 50% of the total handset base and 63% of smartphones ■ Continued pressure in the B2B segment (just less than 50% of service revs) mainly from competition and cost savings at public service entities We forecast billed mobile service revenues to decline at a faster rate than mobile service revenues due to the positive impact from TDC coming on as a customer at the end of 2015.
TeliaSonera (TLSN.ST) 43 22 March 2016
Figure 61: Swedish mobile forecasts In SEK millions, unless otherwise stated 2013 2014 Q1 15 Q2 15 Q3 15 Q4 15 2015 2016E 2017E 2018E 2019E Billed net sales 12,498 12,617 3,160 3,188 3,252 3,186 12,786 12,577 12,435 12,352 12,289 - growth y/y 1.5% 0.9% 2.0% 1.3% 2.2% 0.0% 1.3% -1.6% -1.1% -0.7% -0.5% Interconnect 773 687 172 180 172 175 698 686 679 674 671 Subscriber service revs (billed+IC) 13,271 13,304 3,332 3,367 3,424 3,361 13,484 13,264 13,359 13,403 13,447 - growth y/y -0.5% 0.2% 2.0% 1.3% 2.1% -0.1% 1.4% -1.6% 0.7% 0.3% 0.3% Other service revenues 650 564 133 138 151 173 596 738 738 738 738 Mobile service revenues 13,921 13,867 3,465 3,505 3,575 3,534 14,080 14,002 14,097 14,141 14,186 - growth y/y -0.7% -0.4% 2.0% 1.0% 1.9% 1.2% 1.5% -0.6% 0.7% 0.3% 0.3%
Post-paid subs 4,501 4,618 4,638 4,658 4,650 4,650 4,650 4,670 4,700 4,730 4,760 - net adds 97 117 20 20 (8) (0) 32 20 30 30 30 Pre-paid subs 1,670 1,568 1,495 1,488 1,488 1,417 1,417 1,302 1,222 1,162 1,102 - net adds (513) (102) (73) (7) 0 (71) (151) (115) (80) (60) (60) Total subs 6,171 6,186 6,133 6,146 6,138 6,067 6,067 5,972 5,922 5,892 5,862 - net adds (416) 14 (53) 13 (8) (72) (119) (95) (50) (30) (30) - % pre-paid 27.1% 25.3% 24.4% 24.2% 24.2% 23.4% 23.4% 21.8% 20.6% 19.7% 18.8%
Implied ASPU 168.4 170.3 171.0 173.1 176.5 174.0 173.7 174.3 174.3 174.3 174.3 - growth y/y 1.1% 1.8% 1.3% 3.0% 1.7% 2.0% 0.3% 0.0% 0.0% 0.0% Implied operator revenues per sub 10.4 9.3 9.3 9.7 9.3 9.6 9.5 9.5 9.5 9.5 9.5 - growth y/y -10.9% 3.0% 2.3% 2.2% 1.3% 2.2% 0.3% 0.0% 0.0% 0.0% Implied ARPU 178.7 179.6 180.3 182.8 185.8 183.6 183.2 183.8 187.2 189.1 190.7 - growth y/y 3.3% 0.5% 1.9% 1.3% 3.0% 1.7% 1.5% 1.5% 1.5% 1.5% 1.5%
Customer billing revenues 12,498 12,617 3,160 3,188 3,252 3,186 12,786 12,577 12,435 12,352 12,289 - growth y/y 0.9% 2.0% 1.3% 2.2% 0.0% 1.3% -1.6% -1.1% -0.7% -0.5% Operators revenues 773 687 172 180 172 175 698 686 679 674 671 - growth y/y -11.1% 3.2% 2.2% 1.4% -0.5% 1.6% -1.6% -1.1% -0.7% -0.5% Total subscriber service revenues 13,271 13,304 3,332 3,367 3,424 3,361 13,484 13,264 13,359 13,403 13,447 - growth y/y -0.5% 0.2% 2.0% 1.3% 2.1% -0.1% 1.4% -1.6% 0.7% 0.3% 0.3% Source: Company data, Credit Suisse estimates Swedish EBITDA trends to be broadly flat While we expect Swedish revenue growth trends to worsen in 2016 vs 2015 but forecast broadly flat EBITDA trends with at a 0.4% decline (vs -0.3% in 2015) due to easy comps on OPEX. Telia reported a 9% decline in EBITDA in Q1 15 due to high subsidies and marketing spend, a trend Telia reversed throughout the year and which should help in 2016 as well. We do not forecast much benefit from Telia's cost cutting program as the company has guided for the benefit being skewed towards late in 2016 and a more material impact in 2017.
TeliaSonera (TLSN.ST) 44 22 March 2016
Figure 62: Telia Sweden EBITDA forecasts Sweden 2013 2014 Q1 15 Q2 15 Q3 15 Q4 15 2015 2016E 2017E 2018E 2019E Total Sweden net sales 36,199 36,456 9,050 9,272 9,122 9,750 37,194 37,011 36,728 36,717 36,749 - growth y/y -2.9% 0.7% 3.9% 1.9% 1.5% 0.9% 2.0% -0.5% -0.8% 0.0% 0.1% - growth y/y, ex acq and disposals 2.9% 1.3% 1.5%
OPEX 21,686 22,146 5,782 5,831 5,370 5,943 22,927 22,807 22,507 22,507 22,507 - change y/y (320) 460 667 350 22 (258) 781 (120) (300) 0 0 EBITDA ex non-recurring 14,514 14,311 3,267 3,441 3,752 3,807 14,267 14,204 14,221 14,210 14,242 - margin 40.1% 39.3% 36.1% 37.1% 41.1% 39.0% 38.4% 38.4% 38.7% 38.7% 38.8% - growth y/y -4.9% -1.4% -9.2% -4.9% 3.2% 10.0% -0.3% -0.4% 0.1% -0.1% 0.2% Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 45 22 March 2016
Appendix – TeliaSonera forecasts
Figure 63: TLSN: P&L forecasts
P&L 2014 2015 2016E 2017E 2018E 2019E 2020E Sweden 36,456 37,336 37,011 36,728 36,717 36,749 36,872 - growth y/y 0.7% 2.4% -0.9% -0.8% 0.0% 0.1% 0.3% Europe 39,667 43,730 43,205 42,895 42,837 42,832 42,844 - growth y/y -3.4% 10.2% -1.2% -0.7% -0.1% 0.0% 0.0% International carrier 5,964 6,631 6,963 7,032 7,102 7,174 7,245 Other/eliminations (955) (1,127) (1,200) (1,200) (1,200) (1,200) (1,200) Net sales 81,131 86,569 85,979 85,455 85,457 85,555 85,762 - growth y/y -20.1% 6.7% -0.7% -0.6% 0.0% 0.1% 0.2% - organic growth y/y 2.4% 0.2% -0.6% 0.0% 0.1% 0.2%
Sweden 14,311 14,267 14,204 14,221 14,210 14,242 14,365 - margin 39.3% 38.2% 38.4% 38.7% 38.7% 38.8% 39.0% - growth y/y -1.4% -0.3% -0.4% 0.1% -0.1% 0.2% 0.9% - as % of group 58.7% 56.4% 55.6% 55.1% 54.6% 54.1% 54.0% Europe 9,772 10,584 10,970 11,200 11,438 11,678 11,841 - margin 24.6% 24.2% 25.4% 26.1% 26.7% 27.3% 27.6% - growth y/y 0.3% 8.3% 3.6% 2.1% 2.1% 2.1% 1.4% - as % of group 40.1% 41.9% 42.9% 43.4% 43.9% 44.4% 44.5%
International carrier 371 370 320 350 350 350 350 Other operations -90 60 50 50 50 50 50 EBITDA ex non-recurring 24,364 25,281 25,543 25,821 26,048 26,320 26,606 - margin 30.0% 29.2% 29.7% 30.2% 30.5% 30.8% 31.0% - growth y/y -31.5% 3.8% 1.0% 1.1% 0.9% 1.0% 1.1% - organic growth y/y 0.1% 0.9% 1.1% 0.9% 1.0% 1.1% non-recurring (912) (1,289) (1,000) (800) (500) (500) (500) EBITDA headline 23,453 23,992 24,543 25,021 25,548 25,820 26,106
D&A (10,276) (12,780) (11,177) (11,109) (11,109) (11,122) (11,149) - of which non-recurring (182) (1900) 0 0 0 0 0 EBIT ex non-recurring 14,270 14,401 14,366 14,711 14,939 15,198 15,457
EBIT headline 13,177 11,212 13,366 13,911 14,439 14,698 14,957
Associates, headline 4,567 3,394 3,716 3,992 4,356 4,577 4,577 - of which one off 0 (19) 0 0 0 0 0 Operating income, ex non-recurring 18,837 17,776 18,082 18,704 19,295 19,775 20,034
Operating income headline 17,743 14,606 17,082 17,904 18,795 19,275 19,534
Net finance costs (2,535) (2,917) (2,337) (2,210) (2,001) (1,783) (1,557) PTP, ex non-recurring 16,302 14,859 15,745 16,494 17,294 17,993 18,476
PTP headline 15,209 11,689 14,745 15,694 16,794 17,493 17,976 income taxes (2,989) (2,157) (2,801) (2,982) (3,191) (3,324) (3,416) - effective tax rate 19.7% 18.5% 19.0% 19.0% 19.0% 19.0% 19.0% Net income from Continuing operations 12,219 9,532 11,943 12,712 13,603 14,169 14,561
TeliaSonera (TLSN.ST) 46 22 March 2016
Source: Company data, Credit Suisse estimates
Figure 64: TLSN: Cash flow forecast
Cash flow 2014 2015 2016E 2017E 2018E 2019E 2020E EBITDA, ex non-recurring 24,364 25,281 25,543 25,821 26,048 26,320 26,606 EBITDA, ex non-recurring discontinued operations 10,859 11,035 8,567 8,361 8,262 8,159 8,058 Dividend from associated companies 2,136 6,896 1,200 1,200 1,200 1,200 1,200 - MegaFon 2,136 2,174 1,200 1,200 1,200 1,200 1,200 - Turkcell 0 4,722 0 0 0 0 0 Interest paid (net) (2,607) (1,653) (2,246) (2,251) (2,214) (2,159) (2,097) Income taxes paid (3,178) (3,166) (3,765) (3,863) (4,011) (4,097) (4,151) Payment of restructuring provisions (888) (579) (400) (300) (200) (200) (200) Diff between paid/recorded pensions (988) (845) (800) (700) (700) (700) (700) Change in WC and other (447) (1,721) 0 0 0 0 0 Cash flow from operating activities 29,252 35,249 28,100 28,268 28,386 28,523 28,716
Cash CAPEX (16,205) (18,699) (17,170) (14,542) (14,345) (14,329) (14,327) FCF (TLSN def) 13,047 16,550 10,930 13,725 14,040 14,195 14,389 - growth y/y -20.0% 26.8% -34.0% 25.6% 2.3% 1.1% 1.4% - of which discontinued operations 4,905 4,030 3,886 4,091 4,204 4,146 4,089 FCF (TLSN def) - continuing operations 8,142 12,520 7,044 9,635 9,836 10,049 10,300
Other investing activities (5,774) (10,285) 0 0 0 0 0 Dividends paid (12,729) (12,990) (12,990) (8,660) (8,660) (8,660) (8,660) Other financing activities 1,910 10,329 0 0 0 0 0 Decrease/(increase) in net debt (3,546) 3,603 (2,060) 5,065 5,380 5,534 5,729
Net debt BoP 55,774 59,320 55,717 57,777 52,712 47,332 41,797 Net debt EoP 59,320 55,717 57,777 52,712 47,332 41,797 36,068 - net debt/EBITDA (LTM) 1.7x 1.5x 1.7x 1.5x 1.4x 1.2x 1.0x Source: Company data, Credit Suisse estimates
TeliaSonera (TLSN.ST) 47 22 March 2016
Companies Mentioned (Price as of 17-Mar-2016) Altice (ATCA.AS, €16.86) BT Group (BT.L, 446.5p) Bouygues (BOUY.PA, €36.32) Cellnex Telecom (CLNX.MC, €14.2) Com Hem Holding (COMH.ST, Skr71.85) Deutsche Telekom (DTEGn.F, €15.82) Drillisch AG (DRIG.DE, €40.58) EI Towers (EIT.MI, €49.34) Elisa Corporation (ELI1V.HE, €33.37) Eutelsat Communications (ETL.PA, €28.04) INWIT (INWT.MI, €4.65) Iliad (ILD.PA, €235.45) Inmarsat PLC (ISA.L, 917.5p) KPN (KPN.AS, €3.66) Kcell (KCELq.L, $4.0) Liberty Global (LBTYA.OQ, $37.93) MegaFon (MFONq.L, $11.8) Mobistar (MSTAR.BR, €20.62) NOS (NOS.LS, €6.08) Numericable-SFR (NUME.PA, €37.04) Orange (ORAN.PA, €15.82) Proximus (PROX.BR, €30.68) Rai Way (RWAY.MI, €4.61) SES (SESFd.PA, €25.9) Sunrise (SRCG.S, SFr65.05) Swisscom (SCMN.S, SFr521.0) TDC (TDC.CO, Dkr30.98) TalkTalk (TALK.L, 242.7p) Tele2 AB (TEL2b.ST, Skr76.25) Telecom Italia (TLIT.MI, €1.01) Telefonica (TEF.MC, €9.95) Telefonica Deutschland (O2Dn.DE, €4.7) Telekom Austria (TELA.VI, €5.53) Telenet (TNET.BR, €46.8) Telenor (TEL.OL, Nkr133.8) TeliaSonera (TLSN.ST, Skr41.92, NEUTRAL, TP Skr39.0) Turkcell (TCELL.IS, TL12.29) Vodafone Group (VOD.L, 219.7p)
Disclosure Appendix Important Global Disclosures Henrik Herbst, Jakob Bluestone and Justin Funnell each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for TeliaSonera (TLSN.ST)
TLSN.ST Closing Price Target Price Date (Skr) (Skr) Rating 17-Apr-13 42.90 45.00 N 29-Jan-14 50.15 50.00 31-Jan-14 48.61 49.00 22-Jan-16 39.74 39.00 * Asterisk signifies initiation or assumption of coverage.
NEUTRAL
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the re levant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within
TeliaSonera (TLSN.ST) 48 22 March 2016 an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
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Target Price and Rating Valuation Methodology and Risks: (12 months) for TeliaSonera (TLSN.ST) Method: We base our SEK39 per share target price on: *7.5x 2016E consolidated EV/EBITDA excluding Eurasia *TeliaSonera's stakes in Turkcell and Megafon valued at market price *The proceeds from the announced sale of TLSN's Nepal asset (SEK7.5bn net proceeds) *The remaining net cash held in Eurasia is valued at 50% due to difficulties to repatriate *We assume a 3.5x valuation on the remaining Eurasia assets (ex Nepal) held for sale *We assume SEK10bn in fines relating to the ongoing investigations into TLSN's Eurasian assets We believe we are broadly in line with consensus estimates and thus rate TLSN Neutral. Risk: The main risks to our target price and rating are: Outcome of legal proceedings relating to Turkcell or Megafon - can be positive or negative. A long delay in the resumption of TKC dividends would be a clear negative. Earnings surprises driven by FX and competition. SEK-strength has been the major and rising Nordic competition in recent quarters has been the main source of pressure recently. If both these get worse it would be negative but a turnaround positive.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (EIT.MI, BT.L, BOUY.PA, LBTYA.OQ, CLNX.MC, TELA.VI, TEF.MC, COMH.ST, ORAN.PA, ILD.PA, MSTAR.BR, DTEGn.F, ETL.PA, KPN.AS, TNET.BR, SESFd.PA, O2Dn.DE, RWAY.MI, NUME.PA, ISA.L, TLIT.MI, PROX.BR, ATCA.AS, SCMN.S, MFONq.L, KCELq.L) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (LBTYA.OQ, TELA.VI, TEF.MC, ILD.PA, DTEGn.F, KPN.AS, TNET.BR, O2Dn.DE, NUME.PA, TLIT.MI, ATCA.AS, SCMN.S, MFONq.L) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (RWAY.MI, NUME.PA) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (LBTYA.OQ, TEF.MC, DTEGn.F, O2Dn.DE, TLIT.MI, SCMN.S) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (LBTYA.OQ, TELA.VI, TEF.MC, ILD.PA, DTEGn.F, KPN.AS, TNET.BR, O2Dn.DE, NUME.PA, TLIT.MI, ATCA.AS, SCMN.S, MFONq.L) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (EIT.MI, BT.L, BOUY.PA, LBTYA.OQ, CLNX.MC, TELA.VI, TEF.MC, COMH.ST, ORAN.PA, ILD.PA, TEL.OL, MSTAR.BR, DTEGn.F, ETL.PA, KPN.AS, TNET.BR, SESFd.PA, O2Dn.DE, NOS.LS, RWAY.MI, NUME.PA, ISA.L, TLIT.MI, PROX.BR, ATCA.AS, SCMN.S, MFONq.L, KCELq.L) within the next 3 months.
TeliaSonera (TLSN.ST) 49 22 March 2016
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (RWAY.MI, NUME.PA) within the past 12 months As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (CLNX.MC, ELI1V.HE, ETL.PA, KPN.AS, VOD.L, NUME.PA, ISA.L, TDC.CO). As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (SCMN.S). Credit Suisse has a material conflict of interest with the subject company (LBTYA.OQ) . "Credit Suisse is acting as joint bookrunner to Liberty Global in its financing arrangements in relation to its share acquisition of Cable & Wireless Communications.” Credit Suisse has a material conflict of interest with the subject company (DTEGn.F) . Detusche Telekom AG - Wulf Bernotat, a Senior Advisor of Credit Suisse, is a supervisory board member of Deutsche Telekom AG (DTE) For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (TALK.L, ISA.L). The following disclosed European company/ies have estimates that comply with IFRS: (TLSN.ST, BT.L, BOUY.PA, TELA.VI, TEF.MC, ORAN.PA, ILD.PA, TEL.OL, MSTAR.BR, ELI1V.HE, TEL2b.ST, DTEGn.F, KPN.AS, TALK.L, VOD.L, ISA.L, TLIT.MI, TDC.CO, PROX.BR, SCMN.S). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (LBTYA.OQ, TEF.MC, DTEGn.F, KPN.AS, O2Dn.DE, INWT.MI, NOS.LS, RWAY.MI, NUME.PA, TLIT.MI, ATCA.AS, SCMN.S) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International ...... Henrik Herbst ; Jakob Bluestone ; Justin Funnell For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
TeliaSonera (TLSN.ST) 50 22 March 2016
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