Telenor: The mobile champ on mute

Jennifer L. Schenker
31 Mar 2008

Although you may not know Telenor, the 153-year-old telephone company has a footprint that extends from its native Norway to hot-growth markets including Ukraine, Serbia, Thailand, Bangladesh, and Pakistan. Through smart acquisitions and pioneering moves into new mobile services it now has a market capitalization of $31 billion and counts 129 million subscribers. That makes Telenor (TELNY) the seventh-largest mobile operator in the world, behind China Mobile (CHL) and Vodafone (VOD) but ahead of France Telecom's Orange (FTE) and all of the U.S. carriers.

'It is not the heroes of the industry"”the T-Mobiles and the Oranges"”that will deliver the next billion subscribers,' says John Strand, a mobile analyst and founder of Copenhagen researcher Strand Consult. 'Telenor is well positioned because it entered high-growth emerging market countries 10 years ahead of companies like Vodafone.'

Investors fear the best is over

Yet despite its success, Telenor has run into a bearish patch with investors. Shares in the European telecom sector are down as a whole by 21% since the beginning of the year, but surprisingly, Telenor, the darling of the industry, is down even more"”by 26% this year.

To a certain extent, the company, like other European telcos, is getting whacked by jitters over the global economy"”though analysts say they still believe the telecom sector will be more resilient than others in a downturn. But investors have soured more on Telenor because they worry its rapid growth story is over.

There's some merit to the concern. Telenor's revenue growth fell from 12% in 2007 to 6% in fiscal 2008, due in part to a 10% decline in Norwegian mobile revenues (attributable to stiff price competition, not slackening demand) and a 3% drop in wireline revenues there. What's more, investors are worried that some emerging markets, such as Russia, are now approaching saturation and will no longer provide double-digit growth to offset that decline. In other markets, such as Pakistan and Bangladesh, a combination of political instability and increased competition could slow revenue growth.

That's not the only thing spooking investors. Telenor's stock has been hit by a messy, long-running dispute with Altimo, the telecommunication investment arm of Russian private equity group Alfa Bank. The two companies are fighting over a complex web of holdings in Ukraine, and on Mar. 25, an Altimo subsidiary filed a $1 billion lawsuit against Telenor seeking damages. Telenor rejects the claim.

Analysts see room for more growth

Despite these assorted risks, many analysts think Telenor's shares are undervalued. Brokerage Bear Stearns (BSC) has a price target on the stock some 44% higher than its current trading level. 'Telenor is still growing faster than the market,' says Maurice Patrick, a Bear Sterns analyst in London who follows European telecoms. 'It is a story of two companies: a low-growth, highly cash-generative Nordic business, and a high-growth, non-cash-generating emerging market business.'

That's a good mix of cash flow and growth, agrees Poul Ernst Jessen, an Oslo-based analyst with Danske Bank (DANSKE.CO) who sees 25% upside for the stock. After all, Telenor's projected organic sales growth of 6% is double the average for European telcos and remains above that of comparable peers such as France Telecom, Deutsche Telekom (DT), and BT (BT), analysts say.

In part that's due to its continued opportunity in developing economies. Analysts note that markets such as Bangladesh are only 30% penetrated. And despite impending saturation in Russia and Ukraine, Jon Fredrik Baksaas, who has served as Telenor's chief executive since 2002, still sees growth potential.

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