Recovery becoming more tangible
● Attractively valued play on 5G-driven earnings recovery – upgraded to Buy
We have upgraded Nokia from Hold to Buy and raised our target price from
EUR 4.5 to EUR 5.2. We believe that the financial targets for 2020, which indicate
meaningful earnings recovery from a challenging 2018, should shift the focus
towards revenue stabilization and some growth via 5G commercial rollouts from
2019. Nokia’s initiatives within adjacent markets and end-to-end offering should
bring revenue support to a greater extent and Technologies has good scope to
further broaden the licensee base. Trading at 2020E PER excluding restructuring of
12.5x (11x based on the mid-point of company guidance) and EV/EBIT of 7.2x, we
believe that market expectations are conservative in terms of earnings recovery
during 2019-20. In relative terms, Nokia trades at a 30% discount to Ericsson on
2020E EV/EBIT based on our estimates (25% on 2020 targets) – making Nokia a
good relative pick to play on 5G and market improvement beyond 2018.
● EPS lowered for 2018 by 8% but upped 5% for 2019
We have cut our 2018 EPS estimate 8% due to estimate cuts in Networks and
Global Services. The net revisions are mainly due to EUR 100m costs relating to
5G trials. For 2019 our EPS estimate is up 5% due to higher assumptions for Ultra
Broadband Networks and some upgrades for Technologies (lower cost base).
● Target price raised from EUR 4.5 to EUR 5.2
We have raised our target price for Nokia from EUR 4.5 to EUR 5.2; still based on
an equally weighted average of a peer group valuation of EUR 5.4, sum-of-theparts
(SOTP) of EUR 4.8 and a DCF fair value of EUR 5.6. We now have shifted
our peer group and SOTP-based valuation reference year from 2018 to 2019.