Tele2 AB, a major player in the telecommunications industry, has recently been downgraded to a "sell" rating by UBS Global Research due to concerns about its performance and future prospects. This downgrade led to a 2.8% decline in Tele2's stock, indicating investor apprehension about the company's ability to meet market expectations.
UBS analysts have expressed 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 due to a slowdown in service revenue in Sweden, anticipated declines in mobile pricing, and rising cash taxes. UBS believes that these factors are not fully appreciated by the market, leading to a potential mispricing of the stock. Additionally, Tele2's transition away from legacy TV services, especially its digital terrestrial television (DTT) offering, is expected to further hinder its growth prospects.
UBS analysts have raised concerns about Tele2's capital expenditures, noting that much of the upcoming spending is unavoidable. While there are expectations of cost reductions through initiatives linked to the company's new reference shareholder, UBS believes that significant cost savings are limited. Mandatory expenses, such as the replacement of the 3G network and continued investments in IT and fiber-to-the-home upgrades, are likely to offset any potential reductions in capital expenditures. Despite Tele2's historical reputation for an attractive dividend policy, UBS forecasts only modest growth in dividends, predicting an increase of just SEK 0.1 per share in 2025. The possibility of a special dividend is viewed as unlikely, as UBS suggests that the company is more focused on maintaining capital flexibility for potential acquisitions in Sweden and the Baltics.
Looking ahead, UBS sees some potential upside for Tele2 if regulatory changes can address challenges related to wholesale access and profitability. However, UBS cautions that this potential upside is unlikely to outweigh the immediate challenges the company faces, particularly concerning taxes and capital expenditures. The competitive landscape in the Nordic telecom sector is intensifying, with rivals such as Telenor and Telia demonstrating stronger momentum and more favorable valuations. UBS prefers Telenor, highlighting its more attractive near-term outlook compared to Tele2. While Tele2's exposure to the Swedish telecom market could eventually yield some benefits as competition escalates, the current negative momentum in service revenue growth and limited opportunities for cost reduction initiatives raise significant concerns about the company's ability to fulfill its dividend commitments without putting considerable pressure on its free cash flow.
In summary, UBS's recent downgrade of Tele2 highlights the challenges the company faces in a competitive market characterized by declining service revenues and rising costs. Tele2 must navigate a complex landscape to regain investor confidence and stabilize its financial outlook as analysts continue to scrutinize its performance.