To compete with Apple and Google, Nokia announced last April that it would move all its smartphones on to the Windows software platform. That's good news for Microsoft, but not for firms that supply the Nokia Symbian handsets, which are now heading for the scrap heap.
ST Microelectronics has been one of the victims, as the world's seventh-biggest semiconductor manufacturer. It has a 50:50 joint venture with Ericsson, which itself suffered a 30% fall in revenues to $1.55bn in 2011 and posted an operating loss of $812m. Yet this masked a creditable performance from the remaining 84% of the group. Here EBITA came in at $934m (an 11.4% margin) on turnover up 1% to $8,183m.
Car sales were up 18%, and there was a 90% rise at the MEMS unit, which makes gyroscopes for iPhones and games controllers. Motion control technology allows the screen to switch automatically from portrait to landscape when the device is rotated 90.
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The top priority for CEO Carlo Bozotti is to stop the rot at ST-Ericsson. If there's no sign of positive cash flow soon, I suspect the division will either be sold or shut down. Indeed, on a recent analyst conference call Bozotti admitted as much, saying "we will not let this continue. ST-Ericsson is in a crucial phase focusing on improving execution, lowering its break-even point and reviewing its road map to sustainable profitability."
ST Microelectronics (EuroNext: STM)
So what does this mean in terms of valuation? Let's assume there's no miracle cure for the Ericsson joint venture, and it has to be closed in 2012 at a cash cost of $1bn. The long-term prospects for the remainder of the group look attractive due to its $177bn addressable (if cyclical) market, driven by the proliferation of electronic gadgets. So I value the group on a ten-times EBITA multiple. Adjusting for the net cash of $762m, a $409m pension deficit and $1bn in closure costs, that delivers an intrinsic worth of $9.2bn, or about €7.50 a share.
The chief concerns are another global recession, a lack of decisive action at ST-Ericsson, price deflation and product obsolescence. Indeed, the board anticipates first-quarter revenues to decrease 4% to 10% compared to last quarter.
Nevertheless, with cutting-edge technology and around 21,500 patents, ST Microelectronics looks well placed to prosper from the next stage of internet services.
Rating: SPECULATIVE BUY at €5.40
