Valuation: TeliaSonera

Another day, another Q3 report, it's that time of year! Today it was the turn of the telecommunications giant and large cap stock TeliaSonera. It has been well received by the market, with the share price up 3.8% for the day.

That's a big move for this company that doesn't usually move so much. That makes it boring and potentially interesting although it is a very widely held stock by Swedish private investors. This for me is a small warning flag and probably an outcome of searching for stable yield in this low interest rate environment.

It was a slightly odd report in that both sales and net income were down for the first 9 months of this year compared with 2012. Not only that organic growth is flat. However, the report was better than expected hence the stocks rise.

Perhaps that is good news. Expectations are low for this company, so there is room for surprise on upside. Anyway lets take a look at some numbers to understand what we would get for our money when investing in Telia.

P/E 10.8, P/B 2.1 and dividend yield 5.75%. Nothing untoward here, pretty much standard for such a company. 'Owner earnings' (as described in my SKF post) comes to 24459 msek, that's a lot of money. That gives a 'cash yield' of 10% (dividing by market cap) which is good, but how confident can we be with future earnings?

I plumped for a mediocre growth rate of 2% the coming years and discounted the potential cash flows at 9%. This gave a value of 64kr with a 25% margin of safety and 43kr with a 50% margin; with a current share price of 51.5kr this looks favourable. 

The question still remains if there is a future catalyst for Telia and whether it can acheive the longterm profitability desired. If they can turn around, then I'm certain there is a lot of upside potential in this stock.