On Friday, UBS analysts downgraded telecommunications company Tele2 (ST:TEL2b) AB (TEL2B:SS) (OTC: TLTZY) stock from Neutral to Sell, also lowering the price target to SEK102.00 from SEK104.00. The downgrade reflects concerns about the company's near-term performance and its ability to cover its dividend, contrasting with the more positive outlook for peers Telenor and Telia (ST:TELIA).
Tele2's current challenges include a weakening momentum, which UBS anticipates will result in the company's inability to cover its dividend payouts. The firm's projections for Tele2's expected free cash flow (EFCF) in 2025 and 2026 are 7% and 10% below the consensus, respectively. This negative outlook is set against a backdrop of stronger momentum and more attractive valuations for industry counterparts Telenor and Telia, which UBS suggests could see consensus upgrades.
The downgrade also takes into account the potential impact of the shutdown of legacy TV services and upcoming clarity on cash taxes, which are expected to be the primary drivers of consensus downgrades for Tele2. UBS suggests that these factors, combined with slowing momentum in connectivity service revenues, will likely lead to negative performance for Tele2 in the upcoming quarters.
Despite the near-term headwinds, UBS acknowledges that Tele2 has some longer-term potential attractions. These include its focused 'one market' exposure, an attractive dividend policy, guidance for normalizing capital expenditures in the mid-term, new cost opportunities related to a reference shareholder, and the potential for market consolidation in Sweden.
In contrast to the cautious stance on Tele2, UBS expresses a preference for Telenor, highlighting it as the most favored stock within both the Nordic region and the telecommunications sector as a whole.
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