Canaccord Genuity’s Mike Walkley today reiterates a Hold rating and a $4 price target after having a chat with executives at the Nokia-Siemens Networks joint venture of Nokia (NOK) and Siemens AG (SI) that sells wireless network equipment to carriers.
Things are going very well at NSN, though not enough to change his target for Nokia shares.
Nokia stock today is down 5 cents, or 1%, at $3.94.
Walkley concludes that “NSN management will continue its strong execution on its cost-cutting initiatives, positioning NSN for sustained annual operating margins in the 5%-10% range,” despite slowing carrier spending in the latter half of this year.
After three quarters of “material” improvement in profit, the NSN unit is helping Nokia’s overall results, and there is also an “increased likelihood NSN can emerge as a more independent entity” and that there are “strategic options for Nokia and Siemens to consider during 2013 and beyond,” writes Walkley.
Walkley is impressed with NSN CEO Rajeev Suri:
Rajeev Suri’s strong leadership and NSN’s increased focus on restructuring the business for sustained profitability have positioned NSN to emerge as a leading long-term mobile broadband infrastructure supplier. Following the appointment of Jesper Ovesen as Executive Chairman of the Board of Nokia Siemens Networks, Mr. Suri and his team intensified efforts to ensure NSN could stand alone as an independent company in the highly competitive infrastructure market. Through Rajeev Suri’s leadership and Mr. Ovesen’s expertise in company restructurings, NSN’s restructuring was ahead of plan exiting 2012, resulting in 2012 results ahead of plan and leading to the increased annualized cost savings target of now greater than �1B.
He also sees the company making the most of the move to long-term evolution, or LTE, wireless broadband build-outs:
We believe NSN’s strong LTE, packet core, and IMS product offerings position NSN for improving margins longer term, especially given our long-term belief NSN will emerge as one of three leading mobile broadband suppliers along with Ericsson and Huawei. In order to generate sustainably profitable margins, we believe RAN vendors need to achieve at least high-teens market share. Based on our analysis of the 3G and 4G markets, we believe only Ericsson, Huawei, and NSN will achieve these levels. Also, we estimate NSN has roughly 25% GSM market share and based on Q3/12 LTE sales achieved 21% LTE market share. NSN has also 78 LTE contracts, including new business wins in the competitive South Korea market. While NSN had roughly 5% LTE market share in 2011 primarily due to NSN not participating in the large Verizon and AT&T LTE contracts, we estimate NSN had roughly 20% LTE market share in 2H/2012 and its 78 LTE contracts position NSN to achieve the LTE scale necessary to generate sustained profits longer-term. Further, with Alcatel Lucent only focusing on the U.S. market and China for its wireless business unit, we believe this limits Alcatel Lucent to only a handful of customers. Given the risk this may pose to those customers, we believe NSN could gain market share in the U.S. longer-term. In fact, given NSN’s strong relationship with Softbank through supplying its LTE network in Japan, we believe Softbank’s pending acquisition of Sprint could provide NSN with an opportunity to gain share with this potentially large TD-LTE contract. We also view NSN’s strong LTE market share wins in Korea as proof it will emerge as a top 3 LTE supplier despite Samsung’s increasing efforts to gain market share. Without a strong 2G/3G footprint, we doubt Samsung, despite its vast resources, will emerge as a top 3 mobile broadband vendor. Further, with Nokia winning 6 of the 10 TD-LTE contracts announced to date, we believe NSN is well positioned to win a share of the 200,000 TD-LTE base stations tender in 2H/13. While we anticipate Chinese OEM vendors such as Huawei, ZTE, Datang, and others will win 2/3rds to 3/4ths of the TD-LTE contracts in China, we believe NSN and Ericsson are best positioned to win share allocated to Western OEMs. Further, we believe NSN has a strong TD-LTE solution, and this could lead to strong share of TD-LTE contracts outside of China.
Despite all the good things at NSN, Walkley is not changing his sum-of-the-parts $4 value for Nokia shares. He sees NSN itself being worth 0.55 times enterprise value as a multiple of NSN sales this year of �13.8 billion, and assigns Nokia half that value, or �4.45 billion:
Despite management’s impressive execution on cost-reduction efforts, we anticipate modest cash burn in 2013 due to our increased working capital assumptions for Devices & Services combined with some severance payments. Nokia ended the year with �4.4B in net cash, and we estimate roughly �3.6B in net cash exiting 2013. Since �1.3B of Nokia’s current net cash balance is contributed by NSN, we include �2.3B of this cash in our sum- of-the-parts analysis directly and consider the NSN cash balance below.
Note that this morning, NSN said its chief financial officer Marco Schroeter is stepping down, effective immediately, and will be replaced by chief operating officer Samih Elhage.
would step down and that
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