A cash return ‘monster’?  

We expect >7% in annual cash returns…

• As Nokia announced last year, it will pay E0.26 in special and regular dividends this July, equivalent to a 5.5% dividend yield. 

• Following the AGM on 16th June, the company will start its announced share buyback. At E1.5bn or 5.5% of market cap bought back in the remainder of 2016 and in 2017 this is sizeable. 

• We expect more cash returns in 2017+18 – we estimate Nokia has c E1.4/share in net cash currently 30% of market cap and model that it will return the majority of FCF generated in 2017+ via dividends and buybacks. Overall we expect annual cash returns could yield >7% at the current share price

…with room for potentially much more

• However, there is room for potentially more. Management stated before that it aims to return to IG rating status. Based on comments at the 2014 CMD we believe the ratings agencies have certain parameters on gross cash and debt levels, which we have summarised below. We estimate that these implicitly require Nokia to have ~E5bn in net cash on its balance sheet in 2017/18 to achieve and sustain an IG rating. In this framework we estimate that by 2018 Nokia will have an additional 17% of market cap as excess cash available for shareholder returns over and above IG requirements. Given the company’s track record of returning cash to shareholders, we believe this makes more cash return likely in the coming years. 

A potential beneficiary of European QE  

• Our credit & equity strategists recently published a report highlighting European companies that could most benefit from refinancing the front-end of their debt stock at highly favourable rates as a result of the ECB’s Corporate Sector Purchase Programme. They estimate (based on 5yr CDS spreads) that Nokia may be able to refinance <2020 maturities at potentially only 1.5%.  

• Below we have flexed two refinancing scenarios – 1) A refinancing of all of Nokia’s ‘plain vanilla’ bonds, which have average cost of debt of 6.2%. We have assumed 3% in new interest cost, which could drive c. 5% upgrades to EPS. 2) A partial refinancing of its 2019 bonds only at 1.5%, in line with our credit strategists’ view.  

Valuation attractive, raising PO  

Share price baking in little for IPR and synergies… We show below that Global Network Equipment comps trade at close to 8x 2016E EV/EBITDA on average, with Ericsson at a 10% discount (7.2x).

PO raised to E6.0

Based on our long-term EPS and valuation framework we have raised our PO to E6.0. Our PO is based on a probability-weighted average of three scenarios discounted back to a 2016E valuation using an 8% WACC: Our PO is supported by an SOTP valuation of E6.0/share. 

• Bull case: Nokia exceeds its cost savings target and delivers E1.6bn. Applying a market P/E of 12x ex-cash, implies a 2018 valuation of EUR9.2/NPV EUR7.6.  

• Base case: Management delivers E1bn in synergies by 2018 and E1.3bn by 2019. Applying a sub-market P/E of 11x ex-cash implies 2018 valuation of EUR7.7/NPV EUR6.3. 

• Bear case: All cost savings are neutralised by revenue loss/pricing pressure. Applying a sub-market P/E of 10x ex-cash implies 2018 valuation of EUR5.0/NPV EUR4.1.