Eltel Q1'26: Turnaround firing on more cylinders

Eltel's Q1'26 report came in well above our estimates on both top and bottom line, demonstrating that the turnaround trajectory not only remains intact, but is progressing faster than we projected. Despite Q1 being seasonally the quietest period, Eltel delivered 11% organic growth and stronger-than-expected margin expansion, supported by strong execution in Finland's Power segment and Norway maintaining profitability for the third consecutive quarter, providing further validation of the unit’s ongoing turnaround. Management reiterated confidence in reaching the 5% adjusted EBITA margin target within the previously communicated 12-18 month timeline, with the strong Q1 outcome reinforcing that conviction. While this is encouraging, we remain more cautious and believe the burden of proof is on Eltel to demonstrate that the 5% target is achievable on management's timeline. That said, we raise our 2026-27e earnings estimates following the report, primarily reflecting the stronger-than-expected Q1 performance.  At the current valuation, we continue to see good risk-adjusted return potential and reiterate our Accumulate recommendation with a target price of SEK 11.2 (was SEK 10.2).

Margins exceeded expectations despite seasonal weakness

Group revenue increased by 13% y/y to 191 MEUR, well above our expected 174 MEUR, with organic growth of 11%. At a country-unit level, Finland was the standout performer with 29% y/y growth (Inderes’ estimate: 3%), driven by strong Power volumes and data center solutions. Sweden's reported growth of 2% (Inderes’ estimate: 5%) was carried entirely by SEK appreciation, with organic growth of -3% in local currency reflecting lower Power volumes. Denmark & Germany grew 5% y/y (Inderes’ estimate: 0%) on strong Power performance, while Norway returned to modest growth at 2% y/y, a clear step-up from recent quarters. Adjusted EBITA reached 3.1 MEUR (Q1'25: 0.9 MEUR) and a 1.6% margin, well above our estimate of 1.2%, marking the eleventh consecutive quarter of y/y profitability improvement, primarily driven by notable margin improvement in Norway.

We raise our margin estimates following the Q1 beat

The Q1 report showed encouraging signs that Eltel's margin expansion is progressing ahead of our expectations, driven by a shifting business mix, operational improvements, and a broadening customer base. Management noted that Q1's turbulent geopolitical environment, including commodity price volatility, had only a very minor operational impact in Q1, while acknowledging that the indexation clauses in most major contracts provide better protection than in the past, should the uncertain environment persist. Following the Q1 report, we raise our 2026-27e revenue estimates by 2%, with modestly higher margin assumptions given the stronger-than-expected Q1 performance. Our revised estimates imply adjusted EBITA margins of 3.6% in 2026e and 4% in 2027e (was 3.3%/3.6%). We continue to view the pathway to the 5% margin target as requiring further operational and commercial improvement in the classic business, coupled with a continued increase in the share of the higher-margin Emerging services.

The risk-adjusted return remains attractive despite the post-Q1 surge

Based on our updated estimates, we consider the overall earnings-based valuation for this year to be on the lower side (EV/EBITDA 5x, EV/EBIT 9x, P/E 13x), relative to our acceptable valuation range (EV/EBITDA 5x-7x, EV/EBIT 8x-11x, P/E 9x-13x). We expect valuation multiples to compress to even more attractive levels during 2027 (EV/EBITDA: 4x, EV/EBIT: 7.5x, P/E: 8x), supported by continued earnings growth as margins expand. We feel Eltel is structurally better positioned today to sustain improved profitability, as evidenced by its eleventh consecutive quarter of year-on-year margin improvements and the demonstrated resilience of its contract structure. Consequently, we feel comfortable placing more weight on forward-looking valuation. Our DCF model supports our view, indicating a value per share of SEK 11.2 (was SEK 10.1). Overall, we think the risk-adjusted expected return remains attractive at the current share price level.