Telenor: A Norwegian Cash Machine With Strong Emerging Markets Potential

| About: Telenor ASA (TELNF)

Telenor ASA (OTCPK:TELNF) is a large telecommunications company headquartered in Forebu, Norway. The company has operations in more than thirty countries and serves more than 150 million customers. The company is an excellent investment for those who believe in the emerging markets mobile growth story as Telenor has a significant presence in Eastern Europe and Asia but still remains subject to Western financial disclosure laws. Telenor has also seen stable revenues and cash flow growth over the past year despite experiencing some setbacks in its Asian operations. The company is effectively working through these issues and investors should see share price growth as it does so.

Telenor has surprisingly limited exposure to the troubled economies of Western Europe. The company has operations in Norway, Denmark, Finland, and Sweden. Additionally, the company has indirect exposure to Italy through its 33.0% ownership stake in VimpelCom Ltd. (NYSE:VIP). The company has no other exposure to Western Europe. Instead, the company has devoted its attention towards the rapidly growing economies of Eastern Europe and Asia.

Source: Telenor ASA

Investors that are worried about the ongoing financial and currency crisis occurring in the eurozone have nothing to fear from Telenor's developed markets exposure. Of the countries in which Telenor operates, only Finland uses the euro as its national currency. Sweden and Denmark are both part of the European Union but neither one is part of the eurozone. Norway is not part of the European Union. All of these countries run very low deficits at the worst and have comparatively low levels of debt. This protects Telenor from some of the problems that have plagued telecommunication companies operating in more troubled European nations.

Meanwhile, Telenor has great opportunities in some of the developing countries in which it operates. One of these promising markets is India, located in Southern Asia. Telenor first moved into India in 2009 when it formed a joint venture with Unitech Group, an Indian real-estate company. The joint venture, Uninor, currently serves 31.5 million customers in the nation. Telenor owns 67.25% of the joint venture, which gives it de facto control.

Uninor saw some early success. The company grew from zero to 45.6 million customers from December 2009 until the second quarter of 2012. This made the company by far the fastest grower out of all of the mobile operators in the country that obtained their first spectrum licenses in the government's 2008 auction. However, this early success did not last. On February 2, 2012, the Supreme Court of India cancelled all of Uninor's mobile licenses and ordered the government to conduct new auctions for the use of the Indian wireless spectrum. Uninor chose to scale back its operations following this decision by the Court. The company was also forced to shut down some of its operations but it was able to win licenses to continue operations in the six regions of the country that were most successful prior to the Court's action. These six regions are:

  • Andhra Pradesh
  • Bihar & Jharkhand
  • Gujarat
  • Maharashtra & Goa
  • Uttar Pradesh (East)
  • Uttar Pradesh (West)

The company's regulatory struggles combined with the need to build up Uninor have resulted in the Indian market being a cash sink for Telenor thus far.

Source: Telenor ASA

This money-losing trend may be about to change. As the chart shows, Uninor has been losing progressively less money each quarter as it becomes more established in the Indian marketplace. Telenor stated in its first quarter 2013 presentation that it expects the Indian operation to break even around the end of the year. The joint venture has seen not only improving cash flows but also increasing revenues from the six regions in which it now operates so this provides further optimism regarding the company's ability to achieve this.

Source: Telenor ASA

Another opportunity for Telenor can be found right next door to India in the nation of Bangladesh. Telenor is the majority owner of Grameenphone, the largest mobile phone operator in Bangladesh, and it conducts business in the country through this entity. Telenor struggled in this market last year with revenues falling in the first quarter 2012 compared to the fourth quarter of 2011. The company's revenues fluctuated throughout the year but remained depressed compared to the final quarter in 2011. As was the case in India, the primary reason for the revenue decline in Bangladesh was government regulation. In September 2012, the Bangladeshi government made some changes to its tariff regulations and these changes had a negative effect on the company's average revenue per user (ARPU). Additionally, currency fluctuations played a role. In the first quarter of 2012, Grameenphone's EBITDA increased by 30% year over year when measured in local currency. However, the company's EBITDA only increased by 11.9% when measured in Norwegian kroner.

Source: Telenor ASA

This trend of depressed revenues has now begun to reverse itself. In the first quarter of 2013, Grameenphone added 1.8 million subscribers and revenues grew to a level not seen since 2011.

Source: Telenor ASA

There is still the potential for significantly more mobile growth in Bangladesh. As of July 2012, Bangladesh had only 68 cellular phones for every 100 citizens (the comparable figure for the United States is 103.9 cellular phones per 100 citizens). The population of Bangladesh is approximately 148 million. Therefore, there is considerable room for further growth as Bangladeshis that do not currently have cellular phones adopt them for the first time.

As Telenor's growth story continues, shareholders will benefit through both an increasing dividend and share price appreciation. The company has the stated policy of paying a dividend equaling 50-80% of the company's total annual profit. The company's growth path should then result in a steadily growing dividend due to this policy. The company pays an annual dividend every year around the end of May. The most recent dividend was NOK 6.00 per share and this represents the highest dividend in the company's history.

Source: Telenor ASA

This dividend gives the stock a 4.83% yield. This yield certainly is not particularly high for a telecom but the company's large emerging markets exposure should make up for that. As a result, the company has the potential to serve as something of a cash cow, providing investors with a steadily growing stream of cash along with offering the potential for share price appreciation as it grows its customer base in emerging markets.

Unfortunately, Telenor does not appear to have any immediate short-term catalysts. However, Telenor still has a lot to offer for a potential investor. This is a company with significant exposure to some of the fastest growing emerging economies but has Western governance and management. The company also provides significant diversification away from the U.S. dollar and this could prove to be a valuable benefit going forward. The United States appears almost certain to be running perpetual government budget deficits, a current account deficit, and has one of the highest debt-to-GDP ratios in the world. All of these are bearish for the currency. Norway, to put it mildly, does not have any of these problems.

With that said, there are a few factors that could prove positive for the stock going forward.

  1. The company has stated that it expects to break even in India on an EBITDA basis by the end of the year. If the company achieves or betters this then we could see a reaction in the stock price over the next two quarters. For example, if the company posts a profit in the fourth quarter then the share price could jump due to beating expectations.
  2. Telenor announced on June 27 that it was awarded a nationwide wireless license by the government of Myanmar. The company intends to build its business in that country similarly to how it was done in other South Asian nations. This provides the company with further growth prospects that could contribute to a rising stock price as the story plays out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.