Fitch Ratings upgraded the long-term issuer default ratings and senior unsecured rating of Nokia Corp. to BBB- from BB+, while maintaining its stable outlook.
The rating agency cited the telecommunications company's successful implementation of its cost savings program, sufficiently strong operating margins in the current industry cycle phase and the integration of Alcatel Lucent.
Fitch said the company has come through a long period of acquisitions, asset sales and restructuring, along with a decline in its core business. The result was increased execution risks and low visibility of operating profitability.
However, the company's successful integration of Alcatel Lucent, which Nokia agreed to acquire in 2015, is expected to lower execution risks, enhance its market position and improve economies of scale. In addition, Nokia managed annual cost savings of €1.2 billion.
"Nokia has a leading position in the global telecoms equipment sector, which in the past few years has consolidated into a handful of providers with sufficient scale, experience and breadth of service capability that can support telecom operators," Fitch said.
The rating agency expects Nokia to achieve an adjusted EBIT margin of 9% this year amid a slowdown in 4G expenditure and a boost from the forthcoming 5G rollout by telecommunication operators. Nearly half of the company's adjusted operating profit is expected to be supported by IP licensing, according to Fitch.
Fitch does not expect Nokia to generate significant revenue from 5G over the next two to three years given the availability of relevant spectrum bands and evolution of the broader technological ecosystem. However, the initial deployment of 5G networks starting in the fourth quarter is expected to enable the company to offset the impact of a sectorwide decline.
Despite the difficulty in predicting cycle phases, Fitch expects Nokia to sustain its business model and generate enough organic free cash flow to finance research and development, maintain financial flexibility and support a gradual change in the business mix.