Discussion of patent deals is often fraught with difficulty given the usually opaque
nature of such agreements from an outsider’s perspective. Nokia's announcement
yesterday of the Samsung IPR arbitration was unfortunately no different. While the
financial markets like to know the answer ahead of time, with IPR deals usually no
amount of analysis can provide a confident estimate of such deals. Our approach has
been to therefore take a conservative forecast of Nokia's patent revenue trajectory
and not to base our investment thesis solely on the Technologies unit. Our estimates
are unchanged and our analysis shows that Nokia's IPR business and its self-help
story remains very much intact. While the EUR800m IPR run rate is close to our
forecasts, it was a disappointment relative to SME Direkt consensus estimates of
EUR907m; that disappointment was exacerbated by misunderstanding of the
potential rate to be paid by others, in particular Apple, and the cash generation of the
Technologies division. This had an outsized impact on shares, down -11% (vs. Euro
Stoxx Tech -2%). On our unchanged numbers, Nokia now trades on 1.1x/1.0x
2017/18E EV/sales, 8x/7x EBIT and 11x/10x P/E, valuation multiples we find too
cheap for the growth in earnings and cash flow we forecast Nokia to achieve as it
works through the Alcatel integration. Yesterday's price decline, while painful, was in
our opinion an overreaction, one that creates an even more attractive entry point.
We reiterate our Overweight rating and EUR8.75PT.