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Following multiple earnings resets (IPR, Networks margins) the share price has

underperformed ytd and seems to bake in negligible value for potential ALU deal

synergies and licensing/Technologies. Our analysis suggests that Networks margins

should trough in 1H16, and we view management’s 7% margin floor for 2016 as

conservative. Our bear/base/bull scenario analysis suggests limited/10% downside but

40% to 100% upside potential on a 1-2 year view should management deliver on the

ALU integration. Add in >7% expected cash returns p.a. with room for more, and we

believe it is time to Buy Nokia again.

Management has become a ‘victim’ of its own conservativism issuing ‘only’ a 7% margin

floor for this year. Our analysis suggests guidance is conservative as 1Q is the seasonal

low-point and cost savings and a likely improvement in high-margin US spending should

become tailwinds into 2H. Our refreshed synergy analysis suggests cost savings upside

potential to E1.6bn by 2019E, which could drive a 2.7x recovery in EPS by then.

With 30% of market cap in net cash we expect >7% in annual cash returns including the

E1.5bn share buyback starting in mid-June. By 2018 up to 17% of market cap could be

‘excess cash’ additionally returned to shareholders, in our view. Nokia may also benefit

from the ECB’s Corporate Sector Purchase Program (CSPP) with potentially 3-5% EPS

increases from refinancing at low yields.

We estimate the current share price only gives Nokia credit for pre-synergies Networks

margins (E3.1/share) and net cash (E1.4/share). We believe this implies investors are

potentially getting Technologies and synergies ‘for free’. Our bear/base/bull scenario

analysis suggests limited/10% downside (all cost savings neutralised) but 40% to 100%

upside potential on a 12-24mth view in the event that management delivers on the ALU

i ntegration. On a 7% 2017E FCF yield and 6x EV/EBITDA, multiples also look attractive.