* Upgrade from Reduce to Buy, TP lifted from EUR6 to EUR9
We upgrade the stock from Reduce to Buy to align our rating with our positive view on the combined Nokia/Alcatel-Lucent entity. We lift our TP from EUR6 to EUR9. The shares have dropped by more than 20% since the announcement of the merger project with Alcatel-Lucent, and the riskreward is now becoming fairly attractive with massive 50% upside ahead.
* Networks impacted by multiple negative factors in Q1
Nokia delivered weak margins in networks in Q1 (only 3.2%, down 610bps YOY) due to multiple negative factors coming altogether in Q1, including: 1) lower software sales (down 500bps YOY in the mix, due to lower core
networking and software sales in Japan and the US); 2) the short-term impact of strategic entry deals, particularly in China (large upfront costs but good long-term margins); 3) lower margins in services due to a negative mix (more network rollouts) and a big impact on system integration due to significantly lower very high-margin business coming from one specific customer; 4) higher opex due to a stronger US dollar and investments in new technologies (4G, 5G, Cloud); and 5) more challenging market conditions.
* Networks margin to gradually rebound in coming quarters
CEO Suri seems confident about improving margins materially in the coming quarters and reaching the mid-point of long-term margin guidance in networks this year (close to 9.5% vs. 12.2% last year) as: 1) some negative impacts in Q1 should gradually ease by H2 (higher capacity upgrades, lower impact from strategic entry deals, lower opex increase, higher SI sales thanks to large deal wins); 2) sales should remain strong in coming quarters (+4% LFL this year, as the group still has a high win rate); 3) the group has just launched an expanded software up-sell programme targeting its top 100 customers to boost software revenue; and 4) an acceleration of cost cutting (discretionary and overhead, COGS, R&D). We have cut our networks margin estimate to 9.5% this year (vs. 10.5% previously) and have materially increased the contribution from technologies. We have lifted EPS by 7-8% over 2015-17E.
* Upgrade from Reduce to Buy, TP lifted from EUR6 to EUR9
We upgrade the stock from Reduce to Buy to align our rating with our positive view on the combined Nokia/Alcatel-Lucent entity (see our note from 16 April). The new entity will have leading positions in key markets and benefit from an excellent products-geo fit, larger scale effects, a credible synergies target and relatively limited execution risk. We lift our TP up from EUR6 to EUR9 (18- 20x our EUR0.55 EPS for 2017, discounted back today). Accordingly, we remove Nokia from our Least Preferred Stocks in the sector.