In this recent investors report, Analysts from Credit Suisse weigh up the options facing Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) over NSN especially in the context of low visibility on any potential turnaround in handsets. Whether doing an IPO in parts for its stake in NSN, or buying Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE)’s share either option would help Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), but analysts believe the IPO option crystallizes value for NSN, while also providing better liquidity in their view.
Analysts remain concerned as they find it difficult to believe that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) can attain more than a 3 percent smartphone share long term, making it challenging to deliver profits on a sustainable basis in D&S. As such, they maintain their Underperform rating.
Analysts at CS see D&S sales stabilizing only at €11bn and with GMs likely to remain stuck at 24 percent levels, this may require an OPEX level of €2bn in order to achieve even 5 percent OMs long term. This means a further €1bn of OPEX cut is needed, which could potentially lead to €750mn of incremental cash restructuring. With an 18 percent share in mobile infrastructure market, selective geographic exposure to LTE, and very focused and disciplined strategy, analysts project OMs may prove sustainable at around 7-8 percent levels even in the long term.
Analysts assume 9%/7.5% OMs in 2013/2014, with FCF of €850mn/€675mn.
1 – NSN IPO. This remains the most plausible option in analysts view. If Nokia can get a valuation of 0.60x EV/sales for NSN, and is sold in blocks of 20 percent per year, this could help Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) (excl. NSN) gross/net cash to reach €5.5bn/€2.8bn by 2015 in spite of continued cash burn (vs. €4.1bn/€1.5bn analysts estimate in status quo). However, the risk remains with the valuation multiple over time, if NSN’s performance does not prove sustainable.
2 – Buying Siemens’ share. In this scenario, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) would gain access to NSN’s cash, and also offset the cash burn in D&S buying more time for a turnaround. Analysts at Credit Suisse estimate Nokia would have gross/net cash of €6.7bn/€2.6bn by 2015, with possibility of an IPO at later stage, however this cash includes requirements for both businesses (handsets and infrastructure).
