Research In Motion Ltd (BBRY) NAV 33 Percent Lower than Share Price: CS

Research In Motion Ltd (BBRY) NAV 33 Percent Lower than Share Price: CS
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Smartphones – a lasting disruptive force is the title of a new presentation by Kulbinder Garcha, Managing Director, Credit Suisse, Challenging times. The report notes that Apple Inc. (NASDAQ:AAPL) and QUALCOMM, Inc. (NASDAQ:QCOM) are likely to be the big winners, while Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) and Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) face big challenges ahead. In terms of the challenged companies, Nokia and Blackberry, Garcha notes:

Research In Motion Ltd (BBRY) NAV 33 Percent Lower than Share Price: CS

With limited differentiation for WP8, strong competition and slow portfolio roll out, and continued cash burn ahead, we reiterate our UP rating on Nokia. For Blackberry, like Nokia, we believe it is too late with too little differentiation for BB10 to capture the imagination of the consumer. Further, we note the business model change in services that will result in a significant decline of this high margin revenue stream, driving operating losses and potential cash burn. We retain our underperform rating and target price of $9.

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Further details from Credit Suisse on Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) from that report

We see Blackberry shipping some 15mn/13mn BB10 devices in FY14/15 (smartphone share of 1-2%). First, we believe the specs of the Z10/Q10 are only on par with other smartphones. Second, the bulk of the portfolio is aimed at the high end (LTE and above $400) and will struggle against two formidable competitors of Apple and Samsung given the company’s weaker compute portfolio. Third, BB10 with 125,000 apps is meaningfully behind Windows, iOS and Android. We also believe FCF burn of ~$350mn (ex the Tax receivables benefit) is worrying. Further, the changes in the company’s services business will result in a significant decline in this high margin revenue stream, driving operating losses and potential cash burn. Our EPS estimates are -$0.99/ -$1.16 in FY ’14/’15 and our TP is $9.

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) Concerns Surround BB10 and Margins

2) Concerns remain around BB10 adoption and GM. We expect Blackberry to continue to lose smartphone share globally as we expect its share to fall from highs of 20% in calendar 2009 to ~2% in 2013/2014. Additionally, we believe that BB10 GMs below 25% make sustainable profitability difficult, especially given the company’s push towards lower price points and the potential need to discount, as Nokia did with WP last year. We project hardware revenues of $8.3bn/$5.2bn with GM of 15.6%/16.0% in FY14/FY15.

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) Revenue Stream

3) Decreasing services revenue stream. We believe visibility of the services revenue stream is rapidly deteriorating. First, we are concerned about the accelerating churn of the BB7 platform with over 5% of the base leaving, and we now project year-end subscribers of 63.9mn and 57.6mn in FY14/FY15. Second, with low BB10 services revenue related to NOC and ongoing carrier renegotiations, we believe ARPU will decline by 24%/11% to $3.32/$2.97 in FY14/FY15. We assume services revenue of $2.7bn/$2.2bn in FY14/15, down 32%/22%, further compounding issues around profitability.

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) Valuation

4) Valuation; price target $9. We continue to see further downside. By applying an EV/revenue multiple of 0.2x we arrive our $9 target price. Additionally, if Blackberry cannot be turned around, in the event of a shutdown, we calculate an NAV between $6 and $7, factoring the costs of headcount reduction and various liabilities, while allowing some value for IPR and services steam.

Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) Conclusion

Shares of Research In Motion Ltd (NASDAQ:BBRY) (TSE:BB) closed on Thursday at $9,33 a share (on the NASDAQ). If CS is correct the stock would be worth a third less in worst case scenario. However, investors should keep in mind that this is a worst case scenario and that there is a great investor (Prem Watsa) who is trying to help turn around the company.

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