Nokia: Sensible strategic moves in Network Infrastructure

We reiterate our Reduce recommendation for Nokia but revise our target price to EUR 3.3 (was 3.1 EUR). We believe that the bid for Infinera and the sale of ASN, the submarine network business, are strategically sound moves and strengthen Network Infrastructure's position as Nokia's most valuable network business. However, the price paid for Infinera is high relative to the company's current profitability, and value creation requires the realization of targeted synergies, for which the growing scale of the Optical Networks business provides a good basis. However, the transaction does not completely change the big picture around Nokia, and we believe that the weak earnings outlook for Mobile Networks in the coming years will continue to weigh on Nokia's acceptable valuation level.

ASN divestment included in forecasts

Submarine Networks, which had long been on the list of potential divestments, were a different business from the rest of Network Infrastructure, with a more modest profitability profile. Therefore, we believe that the sale of the business makes sense for Nokia's sharper focus, even if the purchase price (350 MEUR) is not very high in relation to the business' revenue (2023: 1.1 BNEUR). Nokia expects to treat ASN as a discontinued operation from Q2'24, and we have also removed ASN from the Network Infrastructure forecasts, which we have also slightly adjusted for other businesses. As a result, revenue forecasts for the coming years fell by around 5%, but earnings forecasts (adj. EPS) by only 1-2%.

Infinera acquisition appears to make strategic sense

Strategically, the deal makes sense as Nokia has previously talked about the need for more scale in the Optical Networks business to improve profitability. In addition, Nokia and Infinera have limited overlapping customer relationships, and the transaction will strengthen Nokia's position particularly in the North American optical networks market (~60% of Infinera's revenue) and with Internet operators (over 30% of Infinera's revenue). The 2.3 BNUSD price tag for Infinera seems high given the company's current performance, as weak market conditions caused the company's Q1 revenue to fall 22% and EBIT margin to plummet to -8.4%. The midpoint of the company's guidance for Q2 is for revenue to decline around 12% and EBIT margin to land at -3.5%. Therefore, the targeted 14-18% EBIT margin in Network Infrastructure after the merger will require an improvement in the market situation and the targeted synergies of 200 MEUR.

Infinera deal has value creation potential, but doesn't change big picture

The potential value creation of the Infinera acquisition can be gauged, e.g., by using a sum-of-the-parts calculation. With a target EBIT margin of 14-18% in 2027, the new Network Infrastructure adj. EBIT could be around 1.3-1.65 BNEUR. Applying a multiple of 8.5x-9.0x to this, the SOTP value of Network Infrastructure would be around 2.4-5.2 BNEUR higher than our current estimate based on 2025 projections (EBIT: ~1.0 BNEUR). At the lower end of the range, the value creation would remain quite low compared to the purchase price of around 2.1 BNEUR, further underscoring the need to squeeze out successful integration and synergies. The risk, of course, is the fierce competition in optical networking, as evidenced by Nokia's and Infinera's own rather modest profitability in this business. In our view, the Infinera acquisition will not improve Nokia's cash flow profile enough to make the stock's valuation look attractive relative to free cash flow.