Tele2 AB, a major player in the telecommunications industry, has recently been downgraded by UBS Global Research to a "sell" rating due to concerns about its performance and future prospects. This downgrade has led to a 2.8% decline in Tele2's stock, reflecting investor apprehension about the company's ability to meet market expectations.
UBS has downgraded Tele2 to a "sell" rating, citing weakening momentum and various factors that are expected to hinder the company's performance in the coming quarters. UBS analysts express skepticism about Tele2's short-term outlook, particularly regarding its earnings from free cash flow. They project that Tele2's earnings for 2025 and 2026 will be 7-10% below consensus, primarily due to a slowdown in service revenue in Sweden, anticipated declines in mobile pricing, and increasing cash taxes.
UBS also raises concerns about Tele2's capital expenditures, noting that much of the upcoming spending is unavoidable. While there may be opportunities to reduce operating costs, the potential for significant cost savings appears limited. Analysts suggest that any potential reductions in capital expenditures may be offset by mandatory expenses, such as the replacement of the 3G network and ongoing investments in IT and fiber-to-the-home upgrades.
Despite Tele2's historically attractive dividend policy, UBS predicts only modest growth in dividends, with an increase of just SEK 0.1 per share in 2025. The possibility of a special dividend is seen as unlikely, as Tele2 is more likely to prioritize maintaining capital flexibility for potential acquisitions in Sweden and the Baltics.
The downgrade of Tele2 by UBS comes at a time when competition in the Nordic telecom sector is intensifying. Rivals such as Telenor and Telia are showing stronger momentum and more favorable valuations, leading UBS to prefer Telenor due to its more attractive near-term outlook. This competitive pressure adds complexity to Tele2's already challenging situation as the company deals with declining service revenue growth and limited opportunities for cost reduction.
Looking ahead, UBS does see some potential upside for Tele2, particularly if regulatory changes can address challenges related to wholesale access and profitability. However, UBS cautions that any such upside is unlikely to fully offset the immediate challenges posed by rising taxes and capital expenditures. Analysts predict that consensus expectations for Tele2 are likely to be further downgraded as the mid-term outlook becomes clearer, highlighting the uncertainty surrounding the company's financial trajectory.
As Tele2 navigates a competitive landscape and transitions away from legacy services, investors will closely monitor its ability to adapt and respond to these challenges while honoring its dividend commitments.