Investing.com -- Tele2 AB's (ST:TEL2b) stock was down on Friday following a downgrade to "sell" from "neutral" by analysts at UBS Global Research.
Shares of the telecommunications provider were down 2.8% at 07:43 ET (12:43 GMT).
The brokerage has also reduced its price target to SEK 102, down from SEK 104, citing weakening momentum and a series of factors likely to weigh on the company’s performance over the next few quarters.
In the short term, UBS analysts predict Tele2 will struggle to meet expectations, particularly concerning its earnings from free cash flow.
Their estimates for 2025 and 2026 are 7-10% below consensus, driven by a slowdown in Sweden’s service revenue, an expected decline in mobile pricing, and increased cash taxes, which UBS argues are not fully understood by the market.
Furthermore, the company’s ongoing transition away from legacy TV services, particularly its DTT offering, is anticipated to add downward pressure to its growth prospects in the near future.
UBS analysts also expressed concerns about the impact of Tele2’s capital expenditures, noting that much of the upcoming spending is unavoidable.
Despite expectations that operating costs might be trimmed through initiatives linked to its new reference shareholder, the brokerage believes there is limited upside from this angle, especially given the already ambitious efficiency targets priced into the company’s future performance.
Analysts note that any potential capex reductions are likely offset by mandatory expenses, such as the replacement of its 3G network and continued investments in IT and fiber-to-the-home upgrades.
While Tele2 has long been recognized for its attractive dividend policy, UBS forecasts only modest growth in dividends, expecting an increase of SEK 0.1 per share in 2025.
The potential for a special dividend, which some investors had hoped for under the influence of Tele2's new reference shareholder, is also seen as unlikely.
UBS pointed out 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 longer-term prospects, UBS does see some potential upside for Tele2, particularly if regulatory changes provide relief around wholesale access and other profitability challenges.
However, the brokerage believes that this upside will not be sufficient to offset the near-term challenges the company faces, particularly in terms of taxes and capex, and has cautioned that consensus expectations are likely to be downgraded before the mid-term outlook becomes clearer.
Despite the challenges faced by Tele2 in the short term, UBS analysts note that the company’s exposure to Sweden’s telecom market could eventually offer upside.
However, with the negative momentum seen in its service revenue growth and limited room for cost reduction initiatives, the analysts concluded that Tele2 is unlikely to meet its dividend commitments without experiencing significant pressure on its free cash flow.
The downgrade comes at a time when competition in the Nordic telecom sector is intensifying.
While peers like Telenor and Telia (ST:TELIA) are showing stronger momentum and more attractive valuations, UBS’s preference remains with Telenor, flagging its more favorable near-term outlook.