Ericsson Nikola Tesla initiated at HOLD, TP HRK 1,367 - Profit margins growth potential rather limited

The ICT industry is one of the least affected by Covid-19 pandemic lockdown, especially having in mind that Ericsson NTs customers networks have lately had to cope with record usage. However, some projects have likely been delayed due to increased uncertainty and cuts of investment budget plans. Still, we reckon that those investments are more likely to be only delayed, rather than cancelled, given the high capacity requirements of the networks as well as the fierce competition among telecom operators that calls for continuous investments. Thus, we expect a somewhat weaker performance in FY 2020e. On the sales structure side, we expect an increasing share of services revenues, especially the managed services for Hrvatski Telekom, at the expense of networks, which puts pressure on margins. The EBIT margin is set to hover around 6.5% in the following years, as the steadily increasing value of services for Ericsson Corp. should mitigate the adverse impact of the managed services business, after the 5G related investment momentum weakens. Despite the somewhat lower cash generation in 2019 and 2020e, the cash pile remains high and capex returns to a normal (low) level (HRK 44 mn), which mainly relates to real estate maintenance and IT equipment, after the completion of the energy efficiency project on the company premises. Therefore, we expect a dividend to be paid out again from next year on, which remains the key strength of the share. We set the target price at HRK 1,367 and reinitiate the coverage with HOLD recommendation.