We have updated our SOTP analysis for Nokia, and we now see upside to €6.0 at least. In particular, we believe Nokia's transformative deal with Microsoft allows it to drive significant value creation from its vast patent portfolio,
which we believe is applicable to the whole CE industry. Thus, we upgrade our rating to Outperform and increase our TP to €6.0 (up from €4.80) and believe even this could prove conservative over time.
Advanced Technologies (Licensing) worth at least €2.3 per share given 3 factors. First, Nokia's licensing agreements with a number of key players in the industry over the last few years (Apple, Qualcomm and BlackBerry) serve as a proof point as to the strength of the company’s IPR. Additionally, we believe it can grow its annual royalty run-rate of €500mn by a further 40% pursuing licensing agreements with currently unlicensed handset vendors. Second, 90% of Nokia's patents are unlicensed and we believe its IPR, especially in areas such as chipsets and OS, can be applied not only to the handset market but also to the wider CE market. Third, the strategic importance of Nokia's IPR also makes this an acquisition target potentially for Qualcomm, Intel, Apple, Huawei, Google, Ericsson, Samsung or a consortium of tech companies, driving a higher take-out value (could be $15bn, or €11bn implying €3.0 per share).
NSN –decent market share positioning, sustainable OMs of 7% even LT. With 16% share in mobile infrastructure market, only selective geographic exposure in LTE, and a very focused and disciplined strategy, we believe that NSN is likely to see top-line pressures. However, given our view around a pick-up in capex spend and improving business mix, OMs may prove sustainable at around 7% levels even in the long term. For NSN, we assume sales of €11.7bn/€11.1bn with OMs of 8.9%/7.5% in 2013/2014. We value it at €6.6bn, or €1.80 per share, on 2014 EV/sales of 0.60x.
Excess distributable cash of €1.6 per share. Nokia is undergoing a strategic review that could involve asset sale of its IPR and/or HERE business, as well as involve a significant cash distribution. Even if Nokia remains in its current form, we believe that it has €5.8bn of excess distributable cash, or 33% of the market cap.
Nokia's share price reaction to the Microsoft deal itself was somewhat euphoric, sending the shares up some 60% since the announcement of the deal on 3rd Sep. This, in itself, informs us the level of negative value that was being ascribed to its handset business. However, now assuming the transaction closes in Q1 2014 (for which we see few risks), Nokia is likely to be a much more stable organisation. Our extensive review of Nokia's three business segments and updated SOTP analysis suggests scope for further value creation, especially around the IPR business. Overall, we believe this could drive Nokia shares to at least €6.0, some 25% above current levels.
IPR is worth at least €2.2 per share; multiple avenues for value creation. Over the past 8 years, we have written extensively about the strength of Nokia's IPR portfolio and as an evidence, we would point to the patent agreement deals Nokia has signed with Apple and BlackBerry, along with its renegotiation with Qualcomm, which allows it to pay lower royalty rates vs. industry average. However, now with these patents being unencumbered (by not having a handset business), we see multiple roads to value creation. First, we believe that Nokia is not licensing the entire mobile phone market; specifically we estimate they could increase the current royalty run rates for Nokia by 40% by pursuing vendors in China, Korea, and Japan. In addition, as the deals that have been assigned to Microsoft expire (Qualcomm, Ericsson, IBM, Motorola Solutions and Motorola Mobility), Nokia will be able to renegotiate. Third, Nokia has 10,000 patent families with around 30,000 patents and applications, of which only 10% are licensed. This means that there is a significant opportunity to license to the entire compute and CE market given its patents in areas such as component and hardware design, OS and interfaces. Finally, we believe the IPR portfolio has significant potential strategic value to a number of players including Qualcomm, Apple, Samsung, Intel, Broadcom, Ericsson, Huawei and Google or a consortium of all these tech companies. This could mean that the actual sale price may turn out to be meaningfully higher than our €8.4bn valuation (or €2.3 per share).
NSN – €11.1bn sales, 7% OMs in 2014; worth €1.80 per share. With continued strength in capex spend at US and Japan carriers, expected pickup in spending in Korea (after a pause in 1H13) post the recent spectrum auction, LTE deployments beginning to happen in Brazil, we believe that wireless capex trends are likely to remain strong over the next 12-18 months. With NSN having a strong position in selected markets like Korea and Japan, we believe its infrastructure business will also benefit from this trend, but equally we would argue that the company may not see a significant benefit from a pickup in other regions like Europe given its lack of participation in European modernisation contracts and few other emerging markets. Thus, with around 16% share in mobile infrastructure market currently (having declined from around 20% in 2012), selective geographic exposure in LTE, and very focused and disciplined strategy, we project OMs may prove sustainable at around 7% levels even in the long term despite continued top-line pressures. We assume 8.9%/7.5% OMs with sales of €11.8bn/€11.1bn in 2013/2014. Putting it on 0.60x EV/sales on our 2014 estimate, we value it at €6.6bn or €1.8 per share.
HERE worth €0.25 per share; but strategically important asset, ripe for cost optimisation. We believe HERE has been run as somewhat of a cost centre for Nokia's D&S business and may now be ripe for cost optimisations. In fact, we believe OMs here can expand from 1.8% in 2013 to 3% in 2014 and value the business at around €900mn or €0.25 per share. This is based on 1.0x EV/sales on our 2014 estimate, which is in line with TomTom. However, beyond the valuation argument for HERE asset, given the increasing value of maps and associated applications/services in mobile devices, automobile industry and Internet based services, we believe that HERE may also have a strategic value in the industry. Some of its key existing customers are Audi, BMW, Chrysler, Fiat, Ford, General Motors, Hyundai, Kia, Nissan, Toyota, Renault, Mercedes, Volkswagen (all automotive), Microsoft, Yahoo, Amazon and Oracle (all Internet service providers). With Google and more recently Apple continuing to look for ways to strengthen their location assets and capabilities through both organic and inorganic means, we believe that Nokia's mapping asset can be of material strategic value in the automotive and wireless industry.
Excess net cash of €5.8bn, or €1.60 per share. Post the closure of deal with Microsoft (expected in Q1 2014), Nokia will have €7.8bn of net cash assuming the company is cash breakeven on an overall basis, which we believe may prove conservative. We believe may need around €2.0bn to run its NSN business. This would leave excess net cash of €5.8bn, or €1.60 per share, that can be eventually returned back to shareholders over time.
Nokia should benefit from deferred tax assets. On the balance sheet, Nokia have net deferred tax assets of €600mn, however we note that €800mn were written down last year that can also be utilised. Even allowing for tax effects from gains generated on the D&S sale and future licensing revenues from Microsoft, we believe the company will have €457mn on deferred tax assets to work against over the longer term. In turn, this provides value of €0.12 per share, given we continue to fully tax the earnings.