November 27, 2024 10:37 GMT
TECHNOLOGY: Ericsson Curve Moves Inside Nokia’s; Rating Upside Seems Limit
TECHNOLOGY
ERICB
The Ericsson curve has been performing strongly and while we think that momentum remains with the name given top-line strength and better exposure to a recovery in North America, we caution that there is limited rating upside on the cards and we don’t think the name can trade significantly further inside the Nokia curve given it retains a HY rating, is limited by a less diversified (i.e. mobile-focussed) business model and in the face of Nokia’s still strong balance sheet.
- S&P affirmed in Q2 with the outlook moving from Developing to Stable; Ericsson looks well positioned within the rating (2023a leverage of 1x vs. 1.5x upside threshold with FFO/Debt at 63.8% vs. a >60% upside threshold. However, S&P also look for “improved resilience …for instance by shifting its revenues to more service-related revenues…” and while the move shift to ORAN in the telco market will likely reduce proprietary HW demand and boost integration, automation, and managed services needs in a multi-vendor ecosystem, this will be a gradual shift over many years which we feel limits upside pressure in the shorter term.
- Moody’s presents the more interesting case given that they remain on HY and haven’t changed/affirmed their rating since 2021. Post-9M21 results they moved the Ba1 rating to positive outlook and saw gross/net leverage of 1.9x/0.4x; upside threshold of a net cash position, downside threshold of 2.5x gross leverage. One month later they moved the name back to negative outlook on the Vonage with no changes to the leverage thresholds. We estimate that the current ratios are around 2x/1x (no view on adjustments, just a rough calc) which limits upside potential.
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