Ericsson-inspired long-term targets saving the day
Nokia's Q4 report offered exceptional information value as the company
provided precise targets until 2020. Our previous claim of EUR 0.40 per share
long-term earnings power stands and is now supported by Nokia. Business mix
will be more IPR-heavy (from <25% of EBIT to up to 40% especially in the shortterm).
We reiterate our Buy rating and raise our DCF-based target price to EUR
5.0 (4.8) due to significant derisking of the long-term direction. On triggers, we
anticipate news flow regarding an improving networks market even though
short-term financial performance is likely to remain muted. Towards year-end,
there should be room for guidance or IPR-related triggers.
Q4 beat, soft Networks guidance but solid 2020 group targets
As we anticipated, Q4 offered a clear beat on recent IPR deals with Huawei and
Xiaomi (net sales 5% and adjusted EBIT 13% above consensus). Despite raised
Networks market guidance for 2018, Nokia promised only ~7.5% EBIT margin
(consensus 9.3%) and only ~10.5% in 2020 (consensus at 10.6% for 2019).
Technologies will, however, make up in both the short and longer term. Nokia is
guiding for an aggressive 10% CAGR until 2020 (run-rate stands EUR 1.32bn).
This is the key risk factor, as the low-hanging fruit has already been grabbed.
Nokia sees ~10% group EBIT margin and EUR 0.25 EPS in 2018 (consensus
11.0% and EUR 0.27, respectively). For 2020, Nokia promises ~14% EBIT margin
and EPS of EUR 0.395 (consensus 12.4% and EUR 0.32 for 2019, respectively).
Guidance forcing 2018 estimate cuts, 2019-20 consensus intact
New guidance should result in a ~7% cut for 2018 consensus (EUR 0.25 EPS
versus EUR 0.27 consensus), while there should not be a need to trim estimates
for 2019-20 (EUR 0.395 EPS for 2020 versus consensus at EUR 0.38). We trim
our estimates for 2018-19 to be in line with Nokia's outlook comments. We do
not need to revise our 2020 estimates, but the business mix becomes skewed
towards IPRs.
Investment case about high visibility and notable valuation upside
The investment case offers visibility into earnings growth. We assume 2021 EPS
of EUR ~0.40 when full ALU synergies have been reaped, the Networks market
has recovered and the remaining IPR deals have been struck (a ~14% operating
margin), valuing the share at a P/E of 11x. Nokia also trades at a bargain 2020E
EV/EBIT of 6.9x and offers a >4.5% dividend yield