UBS analysts Gareth Jenkins and David Mulholland maintain a Neutral rating for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) as they examine some recent news and notes from the company.
We met senior management from Nokia Solutions and Networks (NSN). The new detail was: 1.NSN sees a sense of rationality returning to the industry and cites limited price aggression 2. The company sees further consolidation around the top 3 vendors as tier 2 vendors struggle 3. While Ericsson (ADR) (NASDAQ:ERIC) cites incumbency, Alcatel Lucent SA (ADR) (NYSE:ALU) (EPA:ALU) cites its Intel relationship/openness and Cisco Systems, Inc. (NASDAQ:CSCO) sees its application layer prowess differentiating in a virtualised mobile world, NSN believes it has a time to market advantage evidenced by 50 customer trials (and 2 wins) in the area 4. Focus clearly remains on FCF/profitability though the company intends to regain European market share 5. Chinese spend is now ramping LTE in earnest.
Given the positives and it is well managed, why not be more positive?
While we recognize the solid management (and importantly its information systems) and focus on cost reduction, until NSN stabilizes its top line (-22% in Q4 y-o-y) and more detail around the IPR business is forthcoming, it is difficult to be more constructive on Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V).
Questions over Nokia’s product gaps
NSN highlighted that it would seek to partnership with others to fill out product gaps citing it has been successful with these in the past. We are concerned however, similarly to Ericsson-Ciena that decision-making/roadmap choices will be less aligned with partnerships than under a fully integrated model such as Alcatel Lucent SA (ADR) (NYSE:ALU) (EPA:ALU).
Our DCF based valuation (WACC 9%, g 2%) remains €5.4/share. Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) trades on 8.0x EV/EBITDA 15E vs. its peers on 8.5x.