Eltel Q2'25: Share price strength outpaces fundamentals

Eltel’s Q2 report was softer than expected across the board. While profitability continued to improve year-on-year, the decline in revenue was somewhat unexpected, and the total contract value came in light. Management cited continued slow decision-making among customers and fewer call-offs under existing frame agreements during the quarter. On a positive note, Eltel is gaining momentum in new and adjacent markets, with revenue from new business more than doubling year-on-year. However, in light of the Q2 results, we have revised our estimates downward, particularly concerning profitability. That said, we believe that the company’s recent enhanced debt structure and steady profitability improvements have lowered the company’s risk profile and warrants a lower cost of capital. The net effect of these changes had a positive effect on our fair value of the share. However, given the recent share price appreciation, we now see the risk-adjusted return over the next 12 months to be insufficient. Therefore, we lower our recommendation to Reduce (was Accumulate) but increase the target price to SEK 9.7 (was SEK 9.0).

Lower than expected across the board

Group revenue decreased by -7% (y/y)  to 201 MEUR, well below our expected 218 MEUR. On the profitability side, adjusted EBITA continued to improve, amounting to 2.5 MEUR (Q2’24: 0.5 MEUR), although the increase was lower than our estimated 4.5 MEUR, primarily due to the lower-than-expected volume as well as gross margin. At a country-unit level, top-line growth was quite mixed across geographies. Sweden delivered a strong year-on-year growth of 15% (9% FX-neutral), well above our estimated 6% and driven by continued good activity within public infrastructure projects. In Finland, however, growth was -8%, clearly falling short of our expected +9%. While Power grew thanks to higher volumes in Solar PV and Data Centers, weaker FTTH volumes had a greater negative impact. We had expected Power growth, including the Taaleri Energia project, to more than offset this. Norway and Denmark & Germany was also below our forecast (-19% vs est. -10% & -9% vs est. +1%). On a more positive note, the profitability development in Norway exceeded our estimates (EBITA-%: -1.6% vs -3%), which positions it well to reach black figures during H2’25 after more than two years of negative margins.

We lower our estimates following the Q2 report

The Q2 report and management’s commentary suggest no major changes to the broader outlook, with demand remaining mixed across geographies and service lines. Outside Norway, demand appears at least decent. However, customer sentiment remains cautious, and decision-making processes continue to be somewhat prolonged. Reflecting on the report, management commentary, and the softer headline figures, we have lowered our estimates for the Group. At Group level, our revenue estimates decreased by 1-3% for 2025-2027, while the corresponding changes in EBITA were 6-18%.

We are now more neutral on the valuation

Since our last update (5/2/2025), the share price has increased by 33%. Following this rally, and after our estimate changes, we now view the overall earnings-based valuation for the current year as stretched (EV/EBITDA 5x, EV/EBIT 13x, P/E 26x), relative to our acceptable valuation range (EV/EBITDA 4x-7x, EV/EBIT 7x-11x, P/E 9x-13x). For 2026, the overall earnings picture looks more neutral (EV/EBITDA 4x, EV/EBIT 9x, P/E 11x). However, considering the current demand picture, we think it doesn't present a compelling reason to be positive on the stock at current levels. That said, we think that Eltel is taking steps in the right direction, both in terms of improving its profitability but also, most recently, enhancing its debt structure. If the profitability continues to improve on the path as we expect and revenue growth starts to pick up, combined with further deleveraging, there could be some upside potential on 2027 multiples. However, reflecting this overall picture, we see the risk-adjusted expected return over the next 12 months to be insufficient at the current share price.