we reinstate our OW rating, Now for the hard work of bringing the Nokia efficiency model to Alcatel Lucent
chops as a cost cutter. In addition to announced synergies, we see
possible further synergies based on the record of previous deals, and also
upside potential from turning around (or if not possible selling), ALU’s lossmaking
optical business. There are also potential margin gains in wireless
from industry consolidation which we do not factor. We reinstate our
Overweight rating (from Not Rated) with a €7 Mar-17 target price.
From wireless equipment to full service “data shoveller”. The merger of
Nokia and Alcatel Lucent has created a full service end to end “data
shoveller” with top-3 market shares in wireless equipment (RAN), routing
& wireline access. It is also fourth ranked in optical communications.
Optical coupled with company consolidation related wireless cuts provide
the most significant potential for margin upside at the combined company.
€900m synergies understated, but not as understated as the most
bullish estimates: Despite considerable restructuring, ALU’s 2015 gross
margin of 36% was below Nokia’s 38.3%. If Nokia improves ALU’s gross
margin to the original Nokia level, it would add €325m to the original ALU
EBIT. This would imply €575m of synergies would come from opex.
€575m is only 8.5% of the combined companies’ 2015 opex. After the
merger of Nokia and Siemens networks businesses, opex declined by €700m
(17%) after 3 years, ie ‘12 vs. ’08. That deal indicates Nokia potentially has
more cuts possible than guided. 17% is likely too high a figure because there
was more overlap between Nokia & Siemens’ networks businesses. We
believe a 13% cut versus separate costs could be achieved, meaning Nokia
could achieve opex synergies of €890m, equivalent to overall synergy of
~€1.2bn. If synergies similar to those for NSN were achieved, we estimate a
figure of €1.5bn, which we believe possible but not clearly achievable.
Valuation and upside: If Nokia were able to achieve €1.2bn of synergies,
then our 2018E EPS for the company would be €0.49. On this assumption,
Nokia is trading at 11x ‘18E earnings. Since its ‘13 restructuring, Nokia has
traded at 15-20x forward PE. If only announced €900m synergies can be
achieved, then the stock is trading at 12.3x, still below recent multiples. In
case of €1.5bn synergies, the stock is trading at 10x.