An increased revenue per customer leads to continued growth and increased margins. A slowdown in the expansion of fiber optics networks but an increase in sales from complementing product categories, such as VPN and cloud services combined with an upgrade of the current fiber optics network is expected to drive growth of 14.7% CAGR between 2018E and 2022E.

The spin-off of Elementica creates positive short-term triggers. Elementica will design and operate a computer server hall which sell excess heat generated from the servers to energy companies. During Q2 2019 Elementica will be spun off in an IPO. As a result, the costs of the project will no longer burden Bahnhof. Bahnhof’s current server hall, Pionen, already delivers excess heat to Fortum. Moreover, Bahnhof has already noted a large interest for the server hall from potential customers, such as large international corporations and public Swedish associations.

Bahnhof’s market share is expected to increase further, enabling further growth. Bahnhof has been elected the top provider of broadband in multiple comparisons and has a history of taking market shares. From 2012 to 2017 their market share has increased from 3.1% to 6.7%. By 2020 their estimated market share is 9.7%.

Maintaining strong margins and high ROE might be difficult in a business with generic products. The costs of changing internet service providers (ISP) are often low, and many competitors offer discounts when customers change provider.

A football field valuation indicates a fair price of 31.6 SEK, indicating upside of  9.0% from the current market price. A football field valuation based on DCF, SotP and historical valuation indicates a fair value price range of 21.8-41.5 SEK.

Analysts: David Raso and Magdalena Johansson

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