We have analysed scope for cash returns and synergies, and believe expectations of the bulls look too high. We think Nokia has a good strategic position, but expect the industry to remain challenged on a 2-3 year view, and would stay on the sidelines for now.
We think bulls are holding out for big synergy upgrades and capital returns.
Nokia has been proactive on both fronts in the past, distributing €1.4bn in dividends in 2014 and €1.5bn this year, alongside share buybacks. The previous restructuring plan also saw material upgrades to savings targets, which we analyse below. However, we think expectations may be too high on both counts. Capital will be constrained by additional external requirements on funds, and we think upgrades to synergy targets last time round were largely
due to business exits. Prospects for the industry are weak until the 5G upgrade cycle starts in 2018/19, so we prefer to sit on the sidelines.
Nokia could have latitude for a further €3bn of cash returns, but this may be lower than expectations.
We think distributions of this order would leave Nokia with an effective net cash position of ~€2bn in early 2017, and we believe management would want to maintain this buffer, given the potential for capital-intensive swap-outs at former Alcatel customers. Management has also been explicit about several factors that reduce the funds available –
factoring unwind, restructuring commitments, and buybacks/dividends already committed – but bulls may not have reflected this in numbers.
Scope for synergy-driven upgrades looks more limited than in the last restructuring plan.
Investors tend to also perceive Nokia to have materially outperformed its last restructuring plan – undertaken following the buy-out of Nokia Siemens Networks (NSN). However, we believe a substantial portion of the increases resulted from business exits (which de facto resulted in cost declines), rather than being driven by material organic outperformance. This time, we expect Nokia to reach its €900m net savings target. We believe upgrades to this figure would be dependent on business exits in Submarine, RF Systems, and potentially other businesses.
A further €3bn would represent €0.5 per share of cash returns, reducing the effective PE multiple by around 1.5 turns - not enough to turn bullish in our view.
Factoring in this €3bn of potential capital returns we think Nokia would trade on 14.2x 2017e earnings and 12.2x - still a 25% premium to Ericsson on 2017e. This may be warranted given Nokia's business mix has a stronger growth profile, but with two years of organic topline decline and weak industry prospects, we would stay on the sidelines in both cases.