Telenor Shares Have a Long Way To Fall

There are so many adjustments going on in the Telenor (TELN) accounts, I feel as if you need a PhD in Crystal Ball reading to understand the underlying performance of the business.

Here are some low points from the results:

• The rollout of HDTV seems to have destroyed earnings in the broadcast division, I don’t know enough about the Scandinavian TV market to say whether this is just a blip or a longer term problem.
• Telenor Sweden is going nowhere and margins in Q4 actually fell on marginal net adds. This business just does not have the market share (17%) to compete. If operating losses continue through 2007, a write-down on the carrying value must be expected. Time might prove Vodafone (VOD) correct in selling out.
• Pakistan looks great with revenues up 45% and market share to 14%, but operating losses have remained at around US$125m. Unfortunately for Telenor and not discussed at all in the conference call was the fact that China Mobile are coming having just bought Paktel (Market share 4%). China Mobile is known for vicious price wars - I expect a bloodbath in the second half of 2007.
• Russia and the Ukraine look as if they are about to go ex-growth in terms of penetration. The growth in the Ukraine has underpinned valuations for quite a while now. It is noticeable that in the Ukraine there are still two operators, one owned by Teliasonera/Turkcell and the other by Vimpelcom/Altimo which are both sub-scale. This normally means only one thing – price wars.
• I do not think there is a possibility of a resolution of the disputes with Altimo, in fact I predict they will get worse in 2007. Telenor are very quick to blame Altimo for their legal disputes, but I don’t see Telenor being conciliatory and trying to resolve the issues. Today’s drop in the share price of 10% should serve as a warning to Telenor to get this dispute resolved quick.
• The political risk in Bangladesh and Thailand is getting worse. The comment that collapse of democracy in Bangladesh will have no effect on telecommunications did nothing to convince me, especially with the news that Nobel Peace Winner and Telenor Partner in GrameenPhone is about to launch into politics. It could be a horrible lose-lose situation for Telenor: the existing political parties will go all out to destroy Yunus and if he wins he will get his way and force GrameenPhone into a “social” company.
• The incredulity from Bakaas in the call that Thailand and Malaysia still want Telenor to reduce its ownership to 49% after all the investments that Telenor have pumped into the economy shows incredible naivety.

To balance it out, here are some highlights:

• It looks as if the situation at ONE in Austria is probably finally going to resolved in the year.
• Serbia looks as if it is of to a good start, but they need to improve to justify the acquisition price.
• Norwegian Mobile performance looks exceptional with a US$160m increase in operating profits year-on-year.
• The Danish mobile market looks as if it is getting less competitive.

The shares are only for the brave and if sentiment changes they have an extremely long way to fall.

TELN 1-yr chart: