Friday, 24 January 2014

Nokia and the Euro5 level

Back in September the value case was pretty clear.  Even though Nokia shares rose sharply post the announcement of the sale of its handsets business to Microsoft, the value case was pretty clear.  As I said back then with the shares trading around Euro3:

'So with the other divisions worth a cumulative Euro6bn, that's a 66% uplift versus the 'stub' value.  Euro5 a share, anyone?'
It was a solid call, even if I say so myself.  Having cashed out of Nokia shares in the Euro5s I couldn't help but notice the volatility they exhibited yesterday after the publication of the company's quarterly numbers. 

Forget whether the Q4 Nokia numbers were at, above or below hopes, what matters is where this business is going.  As I noted back in September, the company has some big gaps between IFRS and non-IFRS performance.  From a prudence perspective I tend to look at the former. 

Looking at the company's continuing three divisions, NSN (Nokia Solutions and Networks) generated an IFRS margin of 3.7% during 2013 and this should be approximately replicable in 2014 as per company guidance.  The Euro450m+ of IFRS operating profit/Euro1bn of non-IFRS profit this implies easily justifies a Euro8bn valuation for this unit.  As noted back in September, the implied valuation of the division was a little more than Euro3bn when Nokia bought out their old partner Siemens last year.  This now looks like a great deal. I like the Network theme a lot (growth of data etc) although I cannot justify a higher valuation given the competitive pressures being applied by Huawei and ZTE from China. 

HERE and Advanced Technology are much smaller divisions.  HERE (location in the cloud) is still running at a headline operating profit loss but Advanced Technology is growing.  The cumulative Euro150m of operating profit / Euro350m of non-IFRS profit the two generate would be lowly valued at Euro2bn. 
Add onto this current net cash of Euro2.3bn plus the soon-to-receive receipts from the sale of the handsets division to Microsoft (Euro5.4bn), there's another Euro8.7bn to add to the sum-of-the-parts.

The total from the above then is Euro18.7bn versus a current market cap of Euro19.7bn. That implies Euro4.90 a share. 

So why even think about it at that level?  Nokia has an opportunity.  Post the completion of the Microsoft deal 44% of its market cap will be in cash.  It could make a rash acquisition but it does not seem to be guiding that way.  What is not in the price is the optionality around the use of this capital. 

In short, back in September I thought Euro5 was a reasonable target for Nokia shares, now I think a dip below that level is an opportunity to start rebuilding a position. 

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