Translation: Original published in Finnish on 3/4/2025 at 8:00 am EET.

We reiterate our Accumulate recommendation and EUR 3.2 target price for Teleste. Teleste's operational turnaround progressed well towards the end of the year, and the market situation in Europe does not seem to be deteriorating further. At the same time, the company's conquest of North America is progressing well, and this year's strong volume growth will also start to be reflected in the company's earnings growth. Teleste now has the opportunity to rebuild its profile as a profitable growth company after several years of stagnation. Given the medium-term earnings growth potential, the valuation of the stock looks moderate and the risk/reward ratio cautiously attractive. 

Investment in new technologies within Broadband Networks finally accelerates with North American pull

In Broadband Networks (2024: 59% of revenue), the investments in next-generation network equipment, which have been expected for years and delayed several times, are finally getting off to a good start, with concrete signs already visible in the orders received by the business unit at the end of the year (Q4’24: +51%). While North American volumes will grow significantly this year, mainly thanks to the main customer (Cox Communications), Teleste has already succeeded in winning other customers as well. Meanwhile, the European market seems to have come to a standstill, and deliveries related to DOCSIS 4.0 technology will also start to be seen here in H2'25. However, growth in the North American market is crucial for Teleste's long-term strategy, as operators in Europe are increasingly shifting their investments to fiber technologies and the market is in structural decline. Thanks to the efficiency measures taken, the unit's profitability should be supported by growth in the coming years (2024: adj. EBIT 7.9%), although expansion into a new market will also require increasing investments. In the short term, potential import tariffs from the US pose a risk. Teleste is trying to protect itself against them by, among other things, increasing local inventories and possibly setting up a final assembly line. Although tariffs could put pressure on profitability, they could probably be passed on to prices quite well, considering that the company's competitors would suffer to a similar extent (no production in the US).

Solid growth outlook for Public Safety and Mobility

In Public Safety and Mobility (2024: 41% of revenue), the order book (Q4'24: 93.3 MEUR), focused on passenger information solutions, is at a good level and supports the unit's solid growth outlook. Teleste is well positioned within its largest and longest-standing customer (Alstom) and the new framework agreement won with Siemens Mobility offers long-term growth opportunities. In video security applications, Teleste has a small and very profitable niche business, but the challenge here is limited growth opportunities. In recent years, Teleste has significantly improved the efficiency of its Public Safety and Mobility operations, which is already reflected in the improved results for 2024 (adj. EBIT 3.5% vs. -0.7%). This creates a good basis for maintaining a steady path of profitable growth in the future.

Accelerating earnings growth in the coming years supports valuation

Based on the estimates for the current year, Teleste's valuation (adj. P/E 13.5x and EV/EBIT 12x) is relatively neutral but not yet particularly attractive. Nevertheless, the Q4 report was encouraging in our view as it showed that 1) the expansion into North America is progressing as planned, 2) the decline in the European market has stopped and 3) the streamlined cost structure has created a good basis for earnings growth as volumes grow in the future. With increased confidence in earnings growth, we are willing to look a bit further ahead in terms of valuation. Our forecasts for 2026-2027 show P/E ratios falling to low levels of 9x-8x and EV/EBIT ratios (9x-8x) are also reasonable. Given the improved business trend and outlook, we consider the valuation and risk/reward ratio of the stock to be cautiously attractive.