TeliaSonera's Growing Asia Presence, Strong Cash Generation Will Reward Investors

| About: Telia Company (TLSNF)

TeliaSonera (OTCPK:TLSNF) (OTCPK:TLSNY) continued its streak of sales and profit growth in its quarterly earnings report. The company has seen sales growth for at least the past eight quarters, and it has improved its EBITDA margins for 12 consecutive rolling quarters. Here are the highlights from the third-quarter earnings report, released October 19:

  • Net sales in local currencies showed organic growth of 2.4% during the quarter. In reported currency (the Swedish krona), net sales decreased by 1.0%. The decrease was due to exchange rate fluctuations.
  • The addressable cost base in local currencies decreased by 0.4%. In reported currency, the addressable cost base decreased by 3.4%.
  • EBITDA, excluding non-recurring items, showed organic growth of 4.0% in local currencies. In reported currency, EBITDA showed organic growth of 0.5%, excluding non-recurring items.
  • The EBITDA margin, excluding non-recurring items, increased to 36.8%.
  • Operating income, excluding non-recurring items, decreased by 7.0% during the quarter. This was due to lower earnings and income from some associated companies.
  • Net income attributable to owners of the parent company decreased.
  • The company had earnings per share of SEK 1.12 ($0.17) for the quarter.
  • Free cash flow increased during the third quarter.
  • Total number of subscribers grew by 1.3 million in the consolidated operations and by 3.7 million in the associated companies. This caused the total number of subscribers to climb to 164.4 million.

TeliaSonera continued its streak of increasing net sales even though currency fluctuations caused the amount to fall when converted back into the company’s native currency. The company’s net sales growth during the quarter was only 2.4%, which is less than what it had posted in recent quarters.

Source: TeliaSonera Q3 Earnings Presentation.

It should come as no surprise to any of my regular readers that Europe is in the middle of a major economic and financial crisis. TeliaSonera is a Swedish company that has managed to grow its revenues straight through the debt crisis. Given that, it is difficult to be critical of the smaller than normal sales increase. The main drivers of growth were Sweden Mobility, Kcell in Kazakhstan, Ncell in Nepal, Yoigo in Spain, and Ucell in Uzbekistan.

I have discussed in previous articles about TeliaSonera that I expect its Asian operations to be major drivers of growth for the company. These results make me even more confident that I am correct. Kazakhstan’s continued economic growth should benefit Kcell and by extension TeliaSonera. TeliaSonera should be gaining an even greater benefit from Kcell’s growth going forward. At the close of the quarter, TeliaSonera owned a 51% stake in Kcell. However, in September, they entered into a deal to increase this stake to 75% plus one share. Kazakhstan is a rapidly developing nation that was a part of the former Soviet Union and as the country’s people become more affluent, Kcell should benefit. Kcell is one of only three licensed GSM mobile network operators in Kazakhstan and TeliaSonera is increasing its stake in the economic growth of this oligarchic market. This is a very shrewd maneuver, and it should prove to be profitable for TeliaSonera.

TeliaSonera also owns a 94% stake in Ucell in Uzbekistan. Ucell is one of only two operators that possess an LTE network in this Asian country. Ucell is a growing mobile operator in the country. Uzbekistan, like its neighbor Kazakhstan, is a former Soviet republic that has seen economic recovery and growth since the country began transitioning to a market-based economy in 1995. Ultimately, Ucell could prove to be a bigger engine of growth for TeliaSonera than Kcell. Here are a few reasons why.

  1. Uzbekistan’s economy is largely driven by the production and export of commodities. Its largest areas of production include cotton, gold, uranium, potassium, and natural gas. As prices and demand for these commodities increase going forward, the country will become richer and enjoy a growing middle class.
  2. Uzbekistan has a significantly larger population than Kazakhstan. A larger population means that the company has more potential customers.
  3. TeliaSonera owns a larger stake in Ucell than in Kcell. This means that a larger amount of the company’s earnings will be assigned to TeliaSonera.

TeliaSonera’s balance sheet has improved due to the increase in cash flow during the quarter. At the end of the quarter, the company’s net debt/EBITDA ratio stood at 1.80x. Compare this to Telefonica (NYSE:TEF), whose total net debt/EBITDA ratio stood at 2.60x at the end of the most recent quarter. TeliaSonera is much less leveraged than Telefonica by any metric. In the current environment where investors have fears over debt, this is something that should make the company more attractive.

TeliaSonera has performed very well in the current environment. Despite all the economic concerns about Europe, the United States, and other countries, this company has increased its growth prospects, its cash generation, and strengthened its balance sheet. This is just the kind of thing we as investors should like to see.

Disclosure: I am long TEF.