We raise our target price for Eltel to SEK 13.8 (was SEK 11.2). The increase reflects updated long-term valuation assumptions, with a lower cost of capital and a slightly higher terminal EBIT margin, rather than changes to our near-term operational estimates, which we leave broadly unchanged. Following the strong post-Q1 share price surge, however, we believe the valuation has run too far, and the risk-adjusted return is no longer attractive at current levels. We therefore downgrade our recommendation to Reduce (was Accumulate). We continue to view the pending Vattenfall framework agreement for the Roslagen and Uppland electricity network as a clear positive that would, if formally signed, add upward pressure to our medium-term estimates. As it has not yet been signed, we make no estimate changes at this stage. We would stress, though, that the agreement itself, and incorporating these into our estimates, would not change our valuation view at current levels.

The investment case relies on continued margin expansion and structural Power demand

In our view, Eltel's investment case rests on the continuation of its profitability turnaround toward the 5% adjusted EBITA target, underpinned by structurally long-term growth drivers, especially in Power (grid reinforcement, electrification, solar PV, data centers). With Eltel having now delivered eleven consecutive quarters of year-on-year margin improvement, we believe the company is structurally better positioned than in the past. In our view, this is supported by a healthier contract structure with broad indexation protection, a business-mix shift toward higher-margin Emerging services, and a more balanced capital structure. While we believe the margin trajectory remains the key positive driver, we think the burden of proof still rests on Eltel to demonstrate that the 5% target is achievable on management's 12-18 month timeline, and we view execution as the main near-term risk. A steady inflow of multi-year framework agreements (Caruna, E.ON, Elisa), coupled with further expansion in Emerging services, supports the revenue base and, in our view, de-risks that path.

Operational outlook unchanged, valuation assumptions refreshed

We leave our estimates broadly unchanged in this update. We continue to expect single-digit revenue growth (2026e: ~864 MEUR, +6%) alongside a gradual margin improvement, with adjusted EBITA rising from ~31 MEUR (3.6%) in 2026e to ~38 MEUR (4.2%) by 2028e as the profitability turnaround progresses. We have, however, re-evaluated the impact of lease liabilities on our cost of capital, which lowers our WACC to 8.5% (was 9.4%), while the cost of equity is unchanged at 10.2%. In addition, we have slightly raised our terminal EBIT margin assumption to 2.8% (was 2.7%), reflecting our growing conviction in the company's long-term profitability after eleven consecutive quarters of margin improvement and a continued mix shift toward Emerging Services. The pending Vattenfall framework agreement represents potential further upside to our estimates once/if formally signed.

The risk-reward cools off after the strong post-Q1 rally

After the strong post-Q1 re-rating (+40%), Eltel's 2026 earnings-based valuation multiples (EV/EBITDA ~6x, EV/EBIT ~12x, P/E ~19x) sit above our acceptable range (EV/EBITDA 5-7x, EV/EBIT 8-11x, P/E 9-13x). We expect revenue growth and continued margin improvement to compress these multiples into 2027, but even then, the valuation looks at best neutral and towards the higher end of our range. The picture changes only if Eltel delivers on its 5% margin target next year; in that scenario, the stock would still look rather cheap at current levels. However, this is something we are not yet convinced of, as reflected in our more conservative estimates (2027-28e EBITA-%: 4-4.2%). Following the strong share price increase post-Q1, we find the risk/reward unattractive and see no reason to chase the stock at current levels. Our DCF model supports a value per share of SEK 13.8 (was SEK 11.2), in line with our target.