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ab Global Equity Research
Sweden
Communications Technology
UBS Investment Research
12-month rating Neutral
Ericsson Unchanged
12m price target SKr72.00/US$9.91
Unchanged
Takeaways from Ericsson India briefing Price SKr73.80/US$10.18 (ADR)
Confirms view of a tough market… RIC: ERICb.ST BBG: ERICB SS
Ericsson’s India briefing confirmed our view of a tough market with spending 2 February 2010
likely to be down meaningfully in 2010 ex the new entrants. Ericsson
acknowledged that operators’ businesses are under pressure from falling ARPUs Trading data (local/US$)
due to the recent tariff wars, there is structural overcapacity at the industry level as 52-wk range SKr79.10-64.20/US$10.88-7.52
there are 10-12 operators in each region and consolidation is the likely end game. Market cap. SKr241bn/US$33.3bn
Shares o/s 3,011m (BFREE)/3,011m (ADR)
…but some positives ADR ratio 1 ADR:1 BFREE
Ericsson indicated that pricing has stabilized, strong subs growth continues and Free float 100%
“human” penetration is 30-40% lower than reported due to dual-SIMs. Further,
Avg. daily volume ('000) 15,705/5,675
Ericsson remains well positioned due to its services capabilities which are
Avg. daily value (SKrm) 1,098.6/56.0
important in a market such as India due to the opex focus of operators.
Balance sheet data 12/10E
The great 3G wait continues
Shareholders' equity SKr147bn
Ericsson indicated that the timeframe for 3G auctions has likely slipped to Aug/Sep
and that there will be a 6-9 month lead time from spectrum grant to service launch. P/BV (UBS) 1.6x
Initial 3G use is likely to be to offset spectrum shortages for voice in urban areas, Net Cash (debt) SKr49.5bn
and we believe the business case for any mass 3G deployment is likely to be
Forecast returns
limited outside the large metros. We believe 3G is increasingly looking like a 2011
story now and even so we would not expect a massive pick up in capex. Forecast price appreciation -2.4%
Forecast dividend yield 2.5%
Valuation – maintain Neutral rating and SEK72 price target Forecast stock return +0.1%
We believe that Ericsson lacks catalysts in the short term and while the valuation is Market return assumption 5.4%
supportive, newsflow around operator capex is likely to continue to be negative Forecast excess return -5.3%
through the reporting season. Our price target is DCF-based (9% WACC, 2% g).
EPS (UBS, SKr)
12/10E 12/09
UBS Cons. Actual
Q1E 1.07 0.95 0.71
Q2E 1.28 1.17 0.91
Highlights (SKrm) 12/08 12/09 12/10E 12/11E 12/12E
Q3E 1.11 1.23 0.88
Revenues 208,930 206,477 209,811 217,246 222,878
Q4E 1.84 1.79 1.27
EBIT (UBS) 22,469 23,777 24,185 25,514 25,910
12/10E 5.30 5.35
Net Income (UBS) 15,996 12,036 16,919 19,284 20,589
12/11E 6.04 6.27
EPS (UBS, SKr) 5.03 3.77 5.30 6.04 6.45
Net DPS (UBS, SKr) 1.85 1.31 1.84 2.10 2.24 Performance (SKr)
Stock Price (SKr) Rel. FT/S&P AWI Europe
Profitability & Valuation 5-yr hist av. 12/09 12/10E 12/11E 12/12E 200 120
EBIT margin % 15.7 11.5 11.5 11.7 11.6 150
100
80
ROIC (EBIT) % 43.3 24.7 25.6 26.3 25.9
100 60
EV/EBITDA (core) x 8.9 5.8 6.4 5.8 5.5
40
PE (UBS) x 16.4 18.7 13.9 12.2 11.4 50
20
Net dividend yield % 2.0 1.9 2.5 2.8 3.0 0 0
01/07
04/07
07/07
10/07
01/08
04/08
07/08
10/08
01/09
04/09
07/09
10/09
01/10
Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items.
Valuations: based on an average share price that year, (E): based on a share price of SKr73.80 on 02 Feb 2010 17:04 EST Price Target (SKr) (LHS) Stock Price (SKr) (LHS)
Rel. FT/S&P AWI Europe (RHS)
Source: UBS
Gareth Jenkins Anuj Krishan Maynard J. Um www.ubs.com/investmentresearch
Analyst Analyst Analyst
gareth.jenkins@ubs.com anuj.krishan@ubs.com maynard.um@ubs.com
+44-20-7567 3950 +44 20756 87105 +1-212-713 3372
This report has been prepared by UBS Limited
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 8.
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Ericsson 2 February 2010
Ericsson India Briefing
Presentation notes
Overall economic growth of >7%, strong macro situation
Telecom companies being pressured due to tariff wars
10-12 operators in each geography, fragmented telecom market
Net adds very high, Dec saw c.19m new subs added
MNP and 3G auction, next major events
Mobile penetration still significantly below other markets and fixed line even
more abysmally low
Data as % of revs still single digit 7-8%, so lots of potential
ARPU levels one of the lowest
VAS in the future and 3G, there is headroom for ARPU going up
New operators just setup. But some getting good subs traction e.g. Uninor
Still robust and buoyant growth
Over last 6 months, subs up 10% but gross revenues down c.1%. Tariff wars
forcing revenues to come down
EBITDA margins also coming down due to the tariff wars
Tata, Shyam Sistema etc. introduced aggressive tariffs
Existing operators cautious on future investments, but new entrants rolling
out aggressively
Some over capacity in urban areas and some rural coverage deferred
3G auctions slipping. Could slip into Aug/Sep timeframe. So private
operators’ roll-out could be Q1 2011. BSNL already has spectrum and
rolling out on a small scale.
3 slots of 5MHz in 2.1GHz band given to 3 successful bidders. 2 slots in
2.3GHz BWA – lots of interest and also interest for TD-LTE
Multiple SIMs phenomena and customers use connections for temp period of
time based on best tariff available
Deep rural roll-outs viable business or not, questions being asked
A lot of opex on diesel generator sets to power BTS due to electricity grid
issues and opex, site costs reduction also very imp
Ericsson has largest prepaid footprint – 150m subs, converged billing
solutions from LHS acquisition
Driving up VAS, hosting solutions e.g. PRBT
UBS 2
Ericsson 2 February 2010
Creating a 3G ecosystem, exploring vertical solutions with colleges,
hospitals etc.
Ericsson still investing in 2G platforms, features to reduce site count by 25-
30%
R&D investments in 2G implies can drive more capacity per MHz of
spectrum
Working on tech that reduces site costs, pioneers of passive and active
sharing concept in India, v. important for rural India as opex high without
this
Zero footprint products, i.e. BTS that can be mounted on existing chassis or
wall mounted, reduce space required in existing shelters
Rural India places either off-grid or unreliable power that require 14-16hrs of
backup power. Blue battery – 1/5th recharge time of normal batteries, 15%
lower power per BTS (goes into sleep mode when no traffic), reduce site
cooling requirements
Microwave solutions as fiber not there. Microwave has a spectrum cost, and
if can drive more bandwidth on microwave then reduce costs for operators
Capable of multi vendor managed services
First MNC to manufacture GSM BTS in India, can do up to 8500
BTS/month
Over 400 employees in R&D – Gurgaon and Chennai
Services Center handling 7 customers across 20 countries
Already working with BSNL as their largest supplier of 3G equipment
Q&A
Q/ Spectrum thin in various circles? How will 3G spectrum be utilized?
Subs/traffic growth or data? Time lag between auctions and spectrum award and
services?
A/ There are pockets of urban pockets with spectrum limitation. So will begin
with voice offset. 120m subs of GPRS/EDGE services. Thinking right now is
that if spectrum cannot be given immediately after auctions then delay the
auctions. 6-9 months lag from allocation of spectrum to service launch.
Q/ Urban areas excess capacity, but tight spectrum? Contradiction? Capacity
dynamics right now?
A/ 10-12 networks rolled out in urban India. New operators roll out initially in
urban areas. Individually operators have limited capacity/spectrum but overall
industry has overcapacity.
Q/ GSM vs. CDMA split and growth rates?
UBS 3
Ericsson 2 February 2010
A/ CDMA as a % of total coming down to global avg of 13-14%. Reliance and
Tata two large CDMA players and MTS Sistema now rolling out.
Q/ Which carriers more aggressive in bidding for 3G spectrum?
A/ All with deep pockets. Can’t predict.
Q/ ARPU coming down, how do you see that playing out?
A/ Indicators seem to point in the direction of consolidation. Cant say how soon
it will happen as most large players.
Q/ Market share trends? Ericsson established position at VOD, Bharti, BSNL.
Not very successful at new ops such as Idea, Uninor etc. 3G. Maintain market
share?
A/ Have made significant progress with new ops as well. Etisalat, Uninor and
Idea – nudging to #1 slot. 2G historical levels of 40% mark. Given embedded
base and R&D investments, it is significant value proposition for operators to
continue using Ericsson.
Q/ Update on 3G at BSNL? Phase 1 largely done and revenues going down?
A/ Phase 1 roll-out getting completed. On an overall business BSNL starving for
capacity. Need to make a determination on the current tender. Either award that
contract or give expansion orders to existing vendors.
Q/ Many consumers opt to have several SIM cards to play on diff tariffs. So
SIMs/subs does not equal human subs/phones?
A/ That’s right. 30-40% overstatement of subs perspective. Dual-SIM phones
available.
Q/ Datacards state of play?
A/ Most GPRS connections on phones. Huge latent demand but 8-10m right
now. EDGE and CDMA both. WiFi/DSL at home and no connectivity issues in
offices.
Q/ Smartphones? Replacement rates? Apps market?
A/ 3G ready phones going up, 15-18m handsets 3G ready. 25-30% in 6 months
will be 3G ready phones.
Q/ Type of apps driving to 3G? Text centric/SMS right now.
A/ 3 broad areas apart from Web search – music, bollywood, sports. Gaming
also surprisingly getting popular on the wireline side.
Q/ Handset subsidies as roll out 3G?
A/ Till couple of years back there were regulatory issues inhibiting bundling and
low cost handsets were available. But with 3G, operators might be tempted to
offer subsidies to retain high value customers.
Q/ Dominant 3G tech?
UBS 4
Ericsson 2 February 2010
A/ WCDMA.HSPA Ppl say 4G will come later to India but not so sure about
this as 2.3GHz auction also.
Q/ Capex intensity right now? With EBITDA margins and ARPU declines?
A/ Industry as a whole capex still buoyant as new entrants rolling out. Right that
operators have structurally higher capex in light of lower ARPUs.
Q/ India in 2010 if 3G postponed, Bharti VOD lowering capex, over capacity
etc? Slow down in 2010?
A/ Still stable as new operators rolling out. Can have 800m subs on 2G so more
investment required.
Q/ Effect of 3G auctions delayed, some pent up demand to spend on 2G
capacity?
A/ Yes, some pent up demand and rural coverage. But new players in catch-up
mode on coverage.
Q/ India spent very less on equipment despite? Can it become more as a % of
overall equipment market?
A/ China geog coverage 98-99% pop coverage, lot more carpet coverage vs.
India. India is early 80%s. That’s one reason. Networks in India as current as
anywhere else. Indian cos have very high technical knowledge, invest in the
latest and foreign operator owners have knowledge also relatively new networks.
Q/ Local manufacturing details?
A/ Keep exploring options.
Q/ How imp is it to be #1 in Indian market?
A/ To invest early in the market has helped to reach the #1 in market. New
operators perception and reality of Ericsson being #1 helped them to easily
select Ericsson.
Q/ TD-LTE timeline and 3G timeline and operators think of skipping 3G
straight to 4G?
A/ Already 3G handsets available, ecosystem there, scale benefit there.
Compelling proposition for operators. 3G required from end consumer
perspective. TD-LTE has increasing momentum because of global operators
choosing it and over time provides interesting tech option. 3G very hot as we
speak to operators.
Q/ First round of BSNL rollout was public RFP and back and forth and very low
prices. 2nd round RFP and other RFPs pricing?
A/ Prices have stabilized in the Indian context. Competition there but steep drop
seen 3-4 years ago not there. More players 3-4 years ago and consolidation has
happened since then. More fiscal responsibility among players and pricing better.
UBS 5
Ericsson
Income statement (SKrm) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch
Revenues 151,821 179,821 187,780 208,930 206,477 209,811 1.6 217,246 3.5 222,878 2.6
Operating expenses (ex depn) (115,430) (142,411) (156,003) (183,570) (185,335) (180,382) -2.7 (184,780) 2.4 (190,058) 2.9
EBITDA (UBS) 36,391 37,410 31,777 31,141 31,601 31,529 -0.2 32,466 3.0 32,819 1.1
Depreciation (5,702) (7,516) (8,363) (8,672) (7,824) (7,343) -6.1 (6,952) -5.3 (6,909) -0.6
Operating income (EBIT, UBS) 30,689 29,894 23,414 22,469 23,777 24,185 1.7 25,514 5.5 25,910 1.6
Other income & associates 2,394 5,934 7,232 (436) (7,400) (1,759) -76.2 673 - 2,065 206.9
Net interest 251 165 83 974 325 777 138.9 777 0.0 777 0.0
Abnormal items (pre-tax) 0 0 0 (5,781) (10,459) (2,100) -79.9 0 - 0 -
Profit before tax 33,334 35,993 30,729 17,226 6,243 21,103 238.1 26,964 27.8 28,752 6.6
Tax (8,875) (9,557) (8,594) (5,559) (2,116) (5,276) 149.3 (7,280) 38.0 (7,763) 6.6
Profit after tax 24,459 26,436 22,135 11,667 4,127 15,828 283.5 19,684 24.4 20,989 6.6
Abnormal items (post-tax) 0 0 0 0 0 0 - 0 - 0 -
Minorities / pref dividends (145) (185) (299) (394) (455) (400) -12.1 (400) 0.0 (400) 0.0
Net income (local GAAP) 24,314 26,251 21,836 11,273 3,672 15,428 320.2 19,284 25.0 20,589 6.8
Net Income (UBS) 23,690 26,251 21,836 15,996 12,036 16,919 40.6 19,284 14.0 20,589 6.8
Tax rate (%) 27 27 28 32 34 25 -26.2 27 8.0 27 0.0
Pre-abnormal tax rate (%) 31 32 37 28 17 24 35.0 28 17.5 29 5.0
Per share (SKr) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch
EPS (local GAAP) 7.67 8.27 6.87 3.54 1.15 4.83 319.3 6.04 25.0 6.45 6.8
EPS (UBS) 7.47 8.27 6.87 5.03 3.77 5.30 40.3 6.04 14.0 6.45 6.8
Net DPS 2.25 2.50 2.50 1.85 1.31 1.84 40.3 2.10 14.0 2.24 6.8
Cash EPS 9.27 10.64 9.50 7.75 6.23 7.60 22.0 8.21 8.1 8.61 4.8
BVPS 34.93 41.28 46.09 48.40 43.79 45.93 4.9 48.13 4.8 52.04 8.1
Balance sheet (SKrm) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch
Net tangible fixed assets 11,889 12,932 13,972 16,067 13,269 11,171 -15.8 10,193 -8.8 9,970 -2.2
Net intangible fixed assets 32,981 41,032 62,135 63,104 62,520 64,901 3.8 67,367 3.8 69,896 3.8
Net working capital (incl. other assets) 4,679 20,646 28,611 24,945 22,355 24,444 9.3 25,818 5.6 26,507 2.7
Other liabilities (4,035) (3,852) (4,881) (4,671) (4,766) (4,766) 0.0 (4,766) 0.0 (4,766) 0.0
Operating invested capital 45,514 70,758 99,837 99,445 93,378 95,750 2.5 98,612 3.0 101,608 3.0
Investments 6,313 9,409 10,903 7,988 11,578 11,578 0.0 11,578 0.0 11,578 0.0
Total capital employed 51,827 80,167 110,740 107,433 104,956 107,328 2.3 110,190 2.7 113,186 2.7
Shareholders' equity 101,622 120,113 134,112 140,823 139,870 146,716 4.9 153,734 4.8 166,210 8.1
Minority interests 850 782 940 1,261 1,157 1,557 34.6 1,957 25.7 2,357 20.4
Total equity 102,472 120,895 135,052 142,084 141,027 148,273 5.1 155,691 5.0 168,567 8.3
Net debt / (cash) (56,536) (47,696) (30,500) (44,524) (44,604) (49,478) 10.9 (54,034) 9.2 (63,915) 18.3
Debt deemed provisions 5,891 6,968 6,188 9,873 8,533 8,533 0.0 8,533 0.0 8,533 0.0
Total capital employed 51,827 80,167 110,740 107,433 104,956 107,328 2.3 110,190 2.7 113,186 2.7
Cash flow (SKrm) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch
Operating income (EBIT, UBS) 30,689 29,894 23,414 22,469 23,777 24,185 1.7 25,514 5.5 25,910 1.6
Depreciation 5,702 7,516 8,363 8,672 7,824 7,343 -6.1 6,952 -5.3 6,909 -0.6
Net change in working capital (10,183) (11,930) (11,948) (10,982) 12,477 (2,089) - (1,374) -34.2 (689) -49.9
Other (operating) (3,641) (6,122) 1,492 24,034 (12,781) 259 - (26) - (965) 3562.0
Operating cash flow 22,567 19,359 21,321 44,193 31,297 29,698 -5.1 31,065 4.6 31,166 0.3
Net interest received / (paid) 251 165 83 974 325 777 138.9 777 0.0 777 0.0
Dividends paid (4,133) (7,343) (8,132) (8,240) (6,318) (8,440) 33.6 (11,839) 40.3 (6,747) -43.0
Tax paid (8,875) (9,557) (8,594) (4,527) (3,127) (5,276) 68.7 (7,280) 38.0 (7,763) 6.6
Capital expenditure (4,539) (5,180) (5,372) (5,542) (5,449) (7,626) 40.0 (8,440) 10.7 (9,216) 9.2
Net (acquisitions) / disposals (957) (14,992) (26,208) 1,836 (17,505) 0 - 0 - 0 -
Other 5,750 2,705 25,218 (8,215) (27,727) (4,259) -84.6 273 - 1,665 510.0
Share issues 117 58 0 (4,607) 0 0 - 0 - 0 -
Cash flow (inc)/dec in net debt 10,181 (14,786) (1,684) 15,872 (28,504) 4,874 - 4,556 -6.5 9,881 116.9
FX / non cash items (6,643) 5,946 (15,512) (1,848) 28,584 0 - 0 - 0 -
Balance sheet (inc)/dec in net debt 3,538 (8,840) (17,196) 14,024 80 4,874 5992.3 4,556 -6.5 9,881 116.9
Core EBITDA 36,391 37,410 31,777 31,141 31,601 31,529 -0.2 32,466 3.0 32,819 1.1
Maintenance capital expenditure (4,539) (5,180) (5,372) (5,542) (5,449) (7,626) 40.0 (8,440) 10.7 (9,216) 9.2
Maintenance net working capital (4,117) (7,700) (10,859) (9,019) 14,724 157 -98.9 872 453.8 1,558 78.6
Operating free cash flow, pre-tax 27,735 24,530 15,546 16,580 40,876 24,060 -41.1 24,899 3.5 25,161 1.1
Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.
UBS 6
Global Equity Research
Sweden
Communications Technology Ericsson
12-month rating Neutral
12m price target SKr72.00 Valuation (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
P/E (local GAAP) 17.3 18.5 61.6 15.4 12.3 11.5
P/E (UBS) 16.4 13.0 18.7 13.9 12.2 11.4
P/CEPS 12.1 8.4 11.3 9.7 9.0 8.6
Net dividend yield (%) 2.0 2.8 1.9 2.5 2.8 3.0
Company profile P/BV 2.9 1.3 1.6 1.6 1.5 1.4
Ericsson is a leading manufacturer of wireless communication EV/revenue (core) 1.7 0.8 0.9 1.0 0.9 0.8
equipment, with over 30% market share globally in 2008. It is EV/EBITDA (core) 8.9 5.7 5.8 6.4 5.8 5.5
organised into three main divisions: networks (68% of revenues in EV/EBIT (core) 11.5 7.9 7.7 8.3 7.3 6.9
2008), professional services (23%) and multimedia (9%). Networks is EV/OpFCF (core) 13.3 10.6 4.5 8.3 7.5 7.1
the equipment business, with the majority of sales from wireless EV/op. invested capital 5.0 1.8 1.9 2.1 1.9 1.8
infrastructure and a smaller portion from fixed-line. Professional
services provides consulting, systems integration and managed Enterprise value (SKrm) 12/08 12/09 12/10E 12/11E 12/12E
services to telecom operators. Through its 50%-owned JVs, Sony Average market cap 206,706 223,479 241,255 241,255 241,255
Ericsson and ST-Ericsson, Ericsson also participates in the handsets + minority interests 394 455 400 400 400
and communications semis markets. + average net debt (cash) (37,512) (44,564) (44,564) (51,756) (58,974)
+ pension obligations and other 9,873 8,533 8,533 8,533 8,533
- non-core asset value (2,967) (5,132) (5,132) (11,578) (11,578)
Core enterprise value 176,494 182,772 200,492 186,854 179,635
Growth (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
Value (EV/OpFCF & P/E) Revenue 12.2 11.3 -1.2 1.6 3.5 2.6
12.0x 20.0x
EBITDA (UBS) -0.2 -2.0 1.5 -0.2 3.0 1.1
10.0x
EBIT (UBS) -2.0 -4.0 5.8 1.7 5.5 1.6
8.0x
15.0x EPS (UBS) -1.4 -26.9 -24.9 40.3 14.0 6.8
6.0x 10.0x
Cash EPS 0.8 -18.4 -19.7 22.0 8.1 4.8
4.0x
Net DPS 10.3 -26.0 -29.1 40.3 14.0 6.8
2.0x
5.0x BVPS 15.0 5.0 -9.5 4.9 4.8 8.1
0.0x 0.0x
12/08 12/09 12/10E 12/11E 12/12E Margins (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
EV/OpFCF (LHS) P/E (RHS)
EBITDA / revenue 20.1 14.9 15.3 15.0 14.9 14.7
EBIT / revenue 15.7 10.8 11.5 11.5 11.7 11.6
Net profit (UBS) / revenue 12.4 7.7 5.8 8.1 8.9 9.2
Profitability
11.80% 27.00% Return on capital (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
11.60% 26.00% EBIT ROIC (UBS) 43.3 22.5 24.7 25.6 26.3 25.9
11.40%
25.00% ROIC post tax - 16.2 20.4 19.5 19.0 18.4
11.20%
24.00% Net ROE 20.5 11.6 8.6 11.8 12.8 12.9
11.00%
23.00%
10.80%
22.00%
Coverage ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
10.60%
10.40% 21.00%
EBIT / net interest - - - - - -
12/08 12/09 12/10(E) 12/11(E) 12/12(E)
Dividend cover (UBS EPS) 3.3 2.7 2.9 2.9 2.9 2.9
EBIT margin (LHS) ROIC (RHS)
Div. payout ratio (%, UBS EPS) 31.4 36.8 34.8 34.7 34.7 34.7
Net debt / EBITDA NM NM NM NM NM NM
ROE v Price to book value
Efficiency ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
13.00% 1.7x
Revenue / op. invested capital 2.8 2.1 2.1 2.2 2.2 2.2
12.00% 1.6x Revenue / fixed assets 3.0 2.7 2.7 2.8 2.8 2.8
11.00%
1.5x Revenue / net working capital 16.8 7.8 8.7 9.0 8.6 8.5
10.00%
1.4x
9.00% Investment ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
8.00% 1.3x OpFCF / EBIT 0.9 0.7 1.7 1.0 1.0 1.0
7.00% 1.2x Capex / revenue (%) 2.8 2.7 2.6 3.6 3.9 4.1
12/08 12/09 12/10(E) 12/11(E) 12/12(E)
ROE (LHS) Price to book value (RHS)
Capex / depreciation 0.7 0.6 0.7 1.0 1.2 1.3
Capital structure (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E
Growth (UBS EPS) Net debt / total equity (40.2) (31.6) (31.9) (33.7) (35.1) (38.5)
Net debt / (net debt + equity) (67.3) (46.2) (46.8) (50.9) (54.2) (62.5)
225000
Net debt (core) / EV (16.1) (21.3) (24.4) (22.2) (27.7) (32.8)
38.6%
220000
27.1%
Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items.
215000 15.7%
Valuations: based on an average share price that year, (E): based on a share price of SKr73.80 on 02 Feb 2010 17:04 EST Market cap(E) may include
forecast share issues/buybacks.
210000 4.3%
-7.1%
205000
-18.6%
200000 -30.0%
Gareth Jenkins Anuj Krishan Maynard J. Um
12/08 12/09 12/10(E) 12/11(E) 12/12(E)
Revenue (LHS) UBS EPS Growth (RHS)
Analyst Analyst Analyst
gareth.jenkins@ubs.com anuj.krishan@ubs.com maynard.um@ubs.com
+44-20-7567 3950 +44 20756 87105 +1-212-713 3372
UBS 7
Ericsson 2 February 2010
Ericsson
Ericsson is a leading manufacturer of wireless communication equipment, with
over 30% market share globally in 2008. It is organised into three main
divisions: networks (68% of revenues in 2008), professional services (23%) and
multimedia (9%). Networks is the equipment business, with the majority of sales
from wireless infrastructure and a smaller portion from fixed-line. Professional
services provides consulting, systems integration and managed services to
telecom operators. Through its 50%-owned JVs, Sony Ericsson and ST-Ericsson,
Ericsson also participates in the handsets and communications semis markets.
Statement of Risk
Upside risks to Ericsson include gaining a more benign pricing environment
following consolidation, improving mix back towards software/expansions,
significant data traffic growth and placing a public cap on acquisitions.
Downside risks include key operator customers cutting capex further, delays in
spending due to network sharing, and the further aggressive moves by the
Chinese vendors in developed markets.
Analyst Certification
Each research analyst primarily responsible for the content of this research
report, in whole or in part, certifies that with respect to each security or issuer
that the analyst covered in this report: (1) all of the views expressed accurately
reflect his or her personal views about those securities or issuers; and (2) no part
of his or her compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by that research analyst in the
research report.
UBS 8
Ericsson 2 February 2010
Required Disclosures
This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates
are referred to herein as UBS.
For information on the ways in which UBS manages conflicts and maintains independence of its research product;
historical performance information; and certain additional disclosures concerning UBS research recommendations,
please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is
not a reliable indicator of future results. Additional information will be made available upon request.
UBS Investment Research: Global Equity Rating Allocations
1 2
UBS 12-Month Rating Rating Category Coverage IB Services
Buy Buy 48% 40%
Neutral Hold/Neutral 40% 35%
Sell Sell 13% 26%
3 4
UBS Short-Term Rating Rating Category Coverage IB Services
Buy Buy less than 1% 17%
Sell Sell less than 1% 67%
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within
the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided
within the past 12 months.
Source: UBS. Rating allocations are as of 31 December 2009.
UBS Investment Research: Global Equity Rating Definitions
UBS 12-Month Rating Definition
Buy FSR is > 6% above the MRA.
Neutral FSR is between -6% and 6% of the MRA.
Sell FSR is > 6% below the MRA.
UBS Short-Term Rating Definition
Buy: Stock price expected to rise within three months from the time the rating was assigned
Buy
because of a specific catalyst or event.
Sell: Stock price expected to fall within three months from the time the rating was assigned
Sell
because of a specific catalyst or event.
UBS 9
Ericsson 2 February 2010
KEY DEFINITIONS
Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12
months.
Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a
forecast of, the equity risk premium).
Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are
subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation.
Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any
change in the fundamental view or investment case.
Equity Price Targets have an investment horizon of 12 months.
EXCEPTIONS AND SPECIAL CASES
UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,
performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:
Negative on factors such as structure, management, performance record, discount.
Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review
Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's
debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.
When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.
Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not
registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in
the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a
research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,
follows.
UBS Limited: Gareth Jenkins; Anuj Krishan. UBS Securities LLC: Maynard J. Um.
Company Disclosures
Company Name Reuters 12-mo rating Short-term rating Price Price date
15, 16
Ericsson ERICb.ST Neutral N/A SKr74.35 01 Feb 2010
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing
date
15. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial
instruments of this company.
16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.
Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.
UBS 10
Ericsson 2 February 2010
Ericsson (SKr)
Price Target (SKr) Stock Price (SKr)
200
150
100
50
0
01-Jan-05
01-Apr-05
01-Jul-05
01-Oct-05
01-Jan-06
01-Apr-06
01-Jul-06
01-Oct-06
01-Jan-07
01-Apr-07
01-Jul-07
01-Oct-07
01-Jan-08
01-Apr-08
01-Jul-08
01-Oct-08
01-Jan-09
01-Apr-09
01-Jul-09
01-Oct-09
01-Jan-10
Buy 2
Neutral 2
Neutral
Sell
No Rating
Source: UBS; as of 01 Feb 2010
Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table
for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6%
above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 =
FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA,
lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6%
below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A
predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities.
A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities.
From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.
UBS 11
Ericsson 2 February 2010
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UBS 12
