Eltel: Cost inflation is still a headache - ABG

Q2 report due Tuesday, 26 July
We expect positive sales growth to continue…
…but margins to still be under pressure, as in Q1

Margin pressure continues
We expect Eltel to deliver sales of EUR 216m in Q2e, up 3% y-o-y (3.1% org. and -0.5% FX). As in Q1, we estimate Sweden and Norway to be the main drivers of the organic growth, but partly offset by Finland, which saw harsh winter conditions during the first weeks of Q2, thus postponing installation work. Additionally, Eltel had a large customer in Denmark that insourced a contract during late Q2’21, which has not been fully compensated by new contracts, thus leading to contiued negative sales growth in Denmark in Q2’22e. Despite increasing volumes for the group, we expect higher-than-normal sick leave and cost inflation (salaries, fuel, asphalt, and steel mainly) to continue to weigh on margins. Eltel announced, in conjunction with its Q1 report, that it is in dialogue with customers to seek compensation for cost increases, however we do not expect any meaningful margin contribution from this yet. All in all, we estimate an adj. EBITA of EUR 3.1m, corresponding to a margin of 1.4% (2.1%).

Hopefully, new CEO will bring clarity to margin improvement
We lower our ‘22e-‘24e adj. EBITA by 3-2% on slightly lower margin assumptions, given continued headwinds as described above. Eltel announced on 8 June that Håkan Dahlström will assume his role as CEO on 1 August 2022, one month ahead of schedule. We hope to get more information regarding; 1) the Polish operations and what strategic alternatives are being evaluated, plus the potential timelines, and 2) Eltel’s 2025 EBITA margin target of 5% and more details on how it will be reached. We now estimate that the adj. EBITA margin will remain flat in ‘22e at 1.5% and then increase to 2.1% in ‘23e and 2.7% in ‘24e. Although we do not have any official estimates for ‘25e, our current trajectory is significantly below Eltel’s financial target.
Trading at 17-9x ‘22e-‘24e EV/E ...
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