Nokia Overweight
Revisiting the investment case. Steady progress expected in the mid-term.
decline, developments at peer Ericsson, and the overall malaise in the
industry. We believe that, while ‘16 is a down year in telecom capex, ‘17 will
see stabilization. Importantly by end of ‘18, Nokia is likely to achieve €1.2bn
of targeted synergies from the Alcatel-Lucent acquisition, additional IP
licensing similar to the achieved template deal with Samsung. Also, there is
potential that Nokia will turn around/dispose or do both to reduce/exit some
assets (Alcatel Submarine Networks & RF Systems). Combined, we believe
Nokia could achieve EPS of as much as 59c in ‘18 which could translate to a
share price of €8.8-11.5 based on its post NSN purchase/handset disposal PE
trading range (15-20x which remains valid due to the earnings growth likely).
Technology licensing provides optionality that the market is not
valuing. The ~€150m additional IPR payment from Samsung (announced
13 Jul ‘16) coupled with Apple being the likely company whose
€150m/year licensing deal expires by end ‘16, means that despite investor
apathy, IPR related earnings are now again an important driver of Nokia
shares. We calculate that Samsung alone pays €400-500m to Nokia. Given
that Apple’s relevant revenue is higher than that of Samsung, a licensing
deal with Apple could thus add €250-350m of revenues. This coupled with
ongoing arbitration with LG Electronics means Nokia may realize up to
€1.3bn by '18, adding 30% to EPS by '18 vs. '15.
Sale of some assets to improve earnings and add a little to cash. Within
Common group functions, Nokia reports results of two businesses – Alcatel
Submarine Networks and Radio Frequency Systems. The first is profitable,
the second is not. We expect that in the next couple of years, Nokia will
either turn around and keep businesses reported here or sell them. Both
options will result in a potential improvement in company EBIT by as much
as €200m from these actions. If sold, the businesses would not only add to
Nokia’s current €7.08bn net cash at end 2Q16 but also improve earnings.
Networks margin to improve due to synergies: Nokia has updated (4 Aug
2016) their synergy target to €1.2bn from €900m. Since the majority of these
synergies will be seen starting in '17 even if Nokia may have a small decline
in '17 sales, earnings would still improve, reflecting double-digit margin
potential and positively impacting the multiple and thus the stock price.