Expectations reset, synergy optionality + cash returns

Following multiple earnings resets (IPR, Networks margins) the share price has underperformed ytd and seems to bake in negligible value for potential ALU deal synergies and licensing/Technologies. Our analysis suggests that Networks margins should trough in 1H16, and we view management’s 7% margin floor for 2016 as conservative. Our bear/base/bull scenario analysis suggests limited/10% downside but 40% to 100% upside potential on a 1-2 year view should management deliver on the ALU integration. Add in >7% expected cash returns p.a. with room for more, and we believe it is time to Buy Nokia again.

1H margin trough, higher synergies drive EPS recovery

Management has become a ‘victim’ of its own conservativism issuing ‘only’ a 7% margin floor for this year. Our analysis suggests guidance is conservative as 1Q is the seasonal low-point and cost savings and a likely improvement in high-margin US spending should become tailwinds into 2H. Our refreshed synergy analysis suggests cost savings upside potential to E1.6bn by 2019E, which could drive a 2.7x recovery in EPS by then.  

>7% cash returns; potential QE beneficiary

With 30% of market cap in net cash we expect >7% in annual cash returns including the E1.5bn share buyback starting in mid-June. By 2018 up to 17% of market cap could be ‘excess cash’ additionally returned to shareholders, in our view. Nokia may also benefit from the ECB’s Corporate Sector Purchase Program (CSPP) with potentially 3-5% EPS increases from refinancing at low yields.  

Synergies & Technologies ‘for free’;7% FCF yield  

We estimate the current share price only gives Nokia credit for pre-synergies Networks margins (E3.1/share) and net cash (E1.4/share). We believe this implies investors are potentially getting Technologies and synergies ‘for free’. Our bear/base/bull scenario analysis suggests limited/10% downside (all cost savings neutralised) but 40% to 100% upside potential on a 12-24mth view in the event that management delivers on the ALU integration. On a 7% 2017E FCF yield and 6x EV/EBITDA, multiples also look attractive.