Global wireless capex declines further; NOK off CL; lower ERIC ests
We introduce 2017 Global wireless capex forecasts
We remove Nokia from the Conviction List (but retain our Buy rating) and remain Neutral on Ericsson with lower estimates following its profit warning on October 12, 2016, and based on our updated Global wireless capex estimates. Our aggregation of GS analysts’ estimates for Global wireless capex points to a further decline in global wireless capex of 3% in 2017, following on from our estimate of a 10% decline this year. We remain of the view that 4G rollouts are relatively advanced in several markets, and that growth will be scarce given large-scale spending associated with 5G is
not expected until 2019/20. While commentary from several vendors and ecosystem participants suggests 4.5G solutions, small cells and public safety could provide a certain level of support to the market in 2017, we expect few regions to see growth overall. GS expects wireless capex in China and Europe (combined c.40% of Global wireless capex) to decline 13%/5% next year, with Japan flat and growth in the US largely due to normalisation to 2015 levels (post declines in 2016). In this environment we favour cost-cutting stories with fixed-line exposure and remain Buy on Nokia.
Lowering estimates to reflect expectations for wireless market
We lower our Nokia Networks revenue estimates by 1.6%/2.1% in 2017/18 driven by our new wireless capex forecast for 2017 (which causes us to forecast a decline in the wireless segment next year), and hence Networks EBIT falls by 6.1%/5.4% in 2017/18. We lower Networks revenue estimates for Ericsson by 2.9%/5.8%/5.8% in 2016/2017/18 and Networks EBIT by 14%/26%/23%, following ERIC’s profit warning and commentary suggesting it will experience persistent weak margins in the next 2-3 quarters.
Implications and valuation for European CommTech
We lower our 12-month PT for Nokia (Buy) to €5.8/US$6.40 (from €6.50/ US$7.20). We reduce our 2017E EV/EBITDA multiple to 7.5x (8.0x) based on lower margin forecasts. Key risks include lower wireless capex, integration risk, pricing. We are Neutral rated on Ericsson and lower our 12-month PT to SKr48/US$5.4 (from SKr57/US$6.7) based on 7.0x 2017E EV/EBITDA. Key risks include better/worse-than-expected cost cutting, patents growth. We value Nokia on a premium to Ericsson (7.5x EV/EBITDA vs. 7.0x for ERIC), given NOK’s exposure to fixed line plus higher growth/margins. NOK’s 11.5x 2017E ex-cash P/E is attractive vs. Ericsson’s 14.6x.