Investing.com — Tele2 Shares of AB (ST:) fell on Friday after analysts at UBS Global Research downgraded it to “sell” from “neutral”.
Shares of the telecommunications services provider were down 2.8% at 07:43 ET (12:43 GMT).
The brokerage also cut its price target to 102 crores, down from 104 crores, citing weakening momentum and a number of factors that are likely to impact the company’s performance over the next few quarters.
In the short term, UBS analysts predict that Tele2 will struggle to meet expectations, especially in terms of free cash flow earnings.
Their estimates for 2025 and 2026 are 7-10% below consensus, driven by a slowdown in service revenue in Sweden, an expected decline in mobile service prices and increased cash taxes, which UBS says are not fully understood by the market.
Furthermore, the company’s ongoing transition away from legacy TV services, particularly its DTT offering, is expected to add downward pressure to its growth prospects in the near term.
UBS analysts also expressed concern about the impact of Tele2’s capital spending, noting that much of the upcoming spending is unavoidable.
Despite expectations that operating costs could be reduced through initiatives related to its new reference shareholder, the brokerage believes there is limited upside from this angle, especially given the already ambitious efficiency targets factored into the company’s future performance.
Analysts note that any potential reductions in capex are likely to be offset by mandatory costs, such as the replacement of the 3G network and continued investment in IT and fiber-to-the-home upgrades.
Although Tele2 has long been known for its attractive dividend policy, UBS predicts only modest dividend growth, expecting an increase of SEK 0.1 per share in 2025.
The potential for a special dividend, which some investors were hoping for under the influence of the new reference shareholder Tele2, is also considered unlikely.
UBS noted that the company is more likely to prioritize its balance sheet for acquisitions in Sweden and the Baltics, which will require maintaining capital flexibility.
In terms of the long-term outlook, UBS sees some potential upside for Tele2, particularly if regulatory changes provide relief around wholesale access and other profitability challenges.
However, the brokerage believes that this increase will not be enough to offset the near-term challenges facing the company, particularly on tax and capital investment, and warned that consensus expectations are likely to be lowered before the medium-term outlook becomes clearer.
Despite the challenges Tele2 faces in the short term, UBS analysts note that the company’s exposure to the Swedish telecommunications market could ultimately provide an advantage.
However, with the negative momentum seen in service revenue growth and limited room for cost-cutting initiatives, analysts concluded that Tele2 is unlikely to meet its dividend obligations without significant pressure on its free cash flow.
The downgrade comes at a time when competition in the Nordic telecommunications sector is intensifying.
While rivals such as Telenor and Telia ( ST: ) are showing stronger momentum and more attractive valuations, UBS’s preference remains with Telenor, indicating its more favorable near-term outlook.
