Eltel initiation of coverage: Green transition enabler seeking a turnaround

Eltel is a leading service provider for critical power and communication networks in the Nordics. The company has struggled for an extended time with its profitability and thus the cornerstones of its current strategy focus on building a foundation for profitable growth. We feel that Eltel is moving in the right direction but anticipate that the turnaround could take time. However, we expect it to be able to gradually improve its profitability in the coming years, but to be largely priced at the current stock price. Thus, we initiate the coverage of Eltel with a Reduce recommendation and target price of SEK 7.20 and monitor the strategy execution from the sidelines at this stage.

Leading service provider for critical infrastructure in the Nordics

Eltel’s main services include maintenance of power grids, upgrades and project work for national transmission system operators and distribution network owners, as well as similar services for telecom operators and other owners of communication networks. Overall, the company’s current core markets are characterized by a high concentration of customers and competitors offering similar products and services. Thus, Eltel’s traditional businesses are heavily commoditized. Reflecting this, Eltel is working to replace commoditized type service sales with a more individualized business model with an enhanced offering by developing the scope and specification of the services, as well as the pricing model. Furthermore, it seeks to enter more heavily into adjacent and/or new business areas (e.g. green energy) to broaden the customer base. In addition to the Nordics, Eltel also operates in Germany, Lithuania and for the time being in Poland, but the company recently announced that it has signed an agreement to divest the Polish business and the deal is expected to be finalized during Q2’24.

We expect the company to improve its margins in the coming years via strategic initiatives

 The company’s historical development has been very challenging due to uncontrolled growth before its IPO in 2015, which led to an extended period of ramping down and divesting of unsuccessful businesses. However, recent years have not been much easier as its profitability was burdened by rapid inflation and postponement of some of its major customers' investments (2021-2023 avg. adj. EBITA% 0.6%). In our opinion, Eltel’s strategic plans are reasonable and it is moving in the right direction, including the divestiture of the historically loss-making Polish business. However, due to the initial situation, we estimate that a sustainable turnaround could take time for processes to be implemented throughout the organization. Against this backdrop, we estimate Eltel’s organic growth to be in low to mid-single-digit levels in the coming years, but profitability to increase gradually (adj. EBITA% 2024-26e: 1.4-2.8%). According to our assessment, there could be upward potential in both the growth rate and profitability, but this would require success in strategy execution, where Eltel still has a lot to prove.

Short-term earnings-based valuation is challenging and at this point, it is still hard to lean too much on 2026

Based on our estimates, we believe that the overall earnings-based valuation is challenging for this year (EV/EBITDA 6x, EV/EBIT 17x, P/E neg.). Whereas we argue next year’s overall earnings-based valuation to be more in neutral territory, at least what comes to EV-based multiples (EV/EBITDA 4x, EV/EBIT 12x, P/E 20x). However, if development continues on the path we expect, we believe there might be some upside in the 2026 multiples (EV/EBITDA 4x, EV/EBIT 8x, P/E 9x) with profitability improvement remaining intact. Due to Eltel’s volatile track record, it is however hard to lean too much on this at this stage. Reflecting this overall picture, we see the risk-adjusted expected return on the share to be below the cost of equity we use over the next 12 months.