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What happened? We attended a sell side dinner with CEO Patrice Caine, CFO Pascal Bouchiat, HIR Alexandra Pascal Bouchiat and IR Baptiste Fournier. Unsurprisingly, the full-year margin target band of 12.2%-12.4% has been confirmed, and we note that mgmt. appeared particularly constructive on the potential for SAMP/T air defense systems and the Rafale in India. BNPP Exane View: Space: While mgmt. did not want to comment on recent media reports and/or commentary of potential JV partners in regards to joining forces in the Space domain in order to compete with rivals from China and the U.S., mgmt. pointed to the potential opportunity related to a potential step-up in EU funding to as much as EUR 40-50bn as part of the MFF 2028-34 of almost EUR 2trn. Irrespective of the JV discussions, the CFO reiterated the breakeven target for FY25 (excl. restructuring charges) repeating the message from the Q2 conf. call that 75% of job redeployments were done per H1. Cyber: After earlier disappointment in regard to the integration of Imperva''s sales team and the OSG decline in H1 in the product business, mgmt. explained that - in addition to earlier underestimated timing needs to train people - the recalibration of incentives to sales staff has been more difficult than initially thought. Yet, mgmt. reiterated the targeted return to growth in H2 vs. H1, while seemingly unwilling to commit to the DD OSG growth target at Cyber by 26 yet. At the same time, the CFO tended to caution consensus full-year adj. EBIT margin 25e for the CDI segment, not least as H125''s 14.2% benefitted from positive one-offs, while highlighting that the 12.2-12.4% group margin target is intact. Defence: Focus of the debate was on last Friday''s Denmark to buy minimum two to up to four SAMP/T NG (new gen) medium range air defence systems from Eurosam, a JV of MBDA and Thales, with mgmt. expressing high confidence in winning additional contracts in future comparing the Danish order with the...
Thales Thales SA
We update our defence spending model supporting visibility of at least 10 years for the sector. While the ~10% share price correction since June on hopes of a ceasefire/peace in Ukraine has provided better entry points into European defence companies, we take a selective view on the sector, which is still up ~80% YTD. We initiate on Dassault Aviation at (+) and on Leonardo and Thales at (=). We upgrade Renk (to = from -) and confirm our ratings for Rheinmetall (+) and Hensoldt (=). We see EU procurement spending more than doubling to EUR310bn in ''29, led by Germany We expect German defence spend to double in ''24-29e to EUR162bn for a 3.5% of GDP quota (procurement ''24/29e: EUR40bn/90bn), with commitment appropriations at EUR200bn in 2030-35e and rest of Europe adding EUR215bn by ''29e (''24: EUR100bn). While any potential peace deal in Ukraine may weigh on share price momentum, these spending assumptions will still hold, we think. Dassault Aviation - Ready to fly again. Initiate at Outperform, TP EUR340 The leading independent European fighter jet OEM has only just started to execute its EUR44bn Defence order book. Supply chain issues are still weighing on Civil (business jets) but should be temporary. Post 30% YTD underperformance vs. EU Defence peers, valuation looks attractive at 13x EV/EBIT ''28e for the stub (excl. 26.7% Thales stake, accounting for c.50% of group market cap). Leonardo - Balanced risk-reward. Initiate at Neutral, TP EUR50 Leonardo ranks among the global leaders in defence electronics and helicopters. Its ''25-29 targets look achievable and are backed by a EUR45bn order book (2.2x sales ''26e). Cons. reflects the ''29 upside case for adj. EBITA of EUR2.8bn but is c.100bp shy of the 12% margin goal. The ~90% rally YTD has pushed EV/EBIT 28e to 13x for 17% adj. EBITA CAGR 25-28e. We initiate at Neutral. Thales - More than French defence but fairly priced. Initiate at Neutral, TP EUR240 Thales ranks #1-3 in aerospace, defence and...
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Results were a few % ahead of our estimates in most areas, and this has driven a small increase in FY sales guidance (up from 5%-6% to 6%-7%) and therefore, given unchanged margin guidance (12.2%-12.4%), in operating profits. These are still below our forecasts for 8.4% sales growth and 13% margins, so we leave our numbers and targets unchanged. We assume that Thales will continue its approach of low-balling guidance and medium-term targets in order to produce “earnings beats”, and do our estimates accordingly. The FY revenue guidance increase seems almost entirely driven by better Defence offsetting weaker Cyber & Digital; C&D is still a significant drag on the Group and, we argue, almost certainly not worth the €8.5bn that Thales paid for Gemalto, Imperva and Tesserent. We detected on the call a distinct rowing back from expectations for a merger of Thales Alenia Space with Airbus’ satellites activities. This is now described as “if, not when” – we suspect that, as well as the improved European institutional market environment, the French and Italian governments are unwilling to accept closure of any of a merged group’s three large satellite assembly clean rooms. A bigger issue for Thales, its investors and other stakeholders, is whether the company has fully embraced the necessary mindset for a decade-plus long European rearmament. Management gave the impression of remaining over-focussed on deleveraging the group rather than pre-emptively investing, especially in working capital; a pervasive scepticism about European budgets may in our view cause Thales to miss key market opportunities to more nimble/aggressive peers. Next events: DSEI, 9-12 September, Q3/9M Orders & Sales, 23 October
We have dropped our coverage of Airbus, BAE Systems, Dassault Aviation, Leonardo, MTU Aero Engines, Rolls-Royce, Safran, Thales owing to internal reorganisation. Our rating, target price and estimates are therefore no longer valid.
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Q1 exposes risks to near-term growth, longer-term ratingThales Q1 Orders & Sales were essentially lacklustre, with weak orders, and a front-loading of Defence revenues that suggests little momentum for much of the remainder of the year.Cyber & Digital was objectively poor: no real sales growth, and problems associated with the integration of Imperva that raise the risk of a downgrade of guidance for the division at the H1 stage.It is increasingly hard to escape wondering whether Thales might ever be able to recoup the €8.3bn that was paid in total for Gemalto, Imperva and Tesserent.We have made pretty minor changes overall to our forecasts, and we introduce forecasts for 2030e. We assume stronger Aerospace profitability, 4%-5% higher Defence growth, but lower Cyber & Digital growth.We make much more significant changes to our valuation however, recognising an emerging gap between our bottom up forecasts (which, inevitably, reflect only known contracts and prospects from late-2024/mid-Q1 2025) and the huge (and, for Thales, very positive) changes to the European defence and space landscapes since January 2025.We make a top-down estimate of the impact on Thales’ defence and space activities of European defence spending rising from the current 2.1% of GDP to 3.0% by 2030e. We already forecast Thales’ defence sales to Europe to near-double by end-decade: 3% of GDP spent on defence would add a further 17% to Defence sales, and 12% to Group EPS.Next events: Paris Air Show, 16-19 June, H1 Results, 23 July
What happened? Thales released a strong set of H2 24 results, starting with a 12% beat on H2 orders (including 16 large orders booked in Q4, vs only two officially made public so far, with strong growth in Europe (outside France and the UK), APAC and the Middle East) and a 4% beat on H2 sales, all driven by a strong outperformance of Defence topline (9% above consensus in H2) despite cautious comments of the company on its ramp up ability throughout the year, supported by demand for Land and Air Systems and positive cut-off effects. H2 EBIT came 5% above consensus expectations, driven by a 60bps margin beat in Aerospace (including negative Space EBIT, as expected), and the 9% sales beat in Defence (Defence margin in line with expectations). At this stage, the analysis of the EBIT does not show any big surprise, with RandD in line, a bit less restructuring charges than expected, higher cost increase (SGandA) but higher contribution from acquisitions. We note a EUR35m headwind from Equity Affiliates (outside Naval Group) that we still need to clarify. FCF came about EUR300m above expectations in H2, with a cash conversion ratio of 114% of net income on continuing operations (vs c.100% guidance). The 2025 outlook is consistent with the group''s communication at its November CMD, with 5-6% organic growth and a 12.2-12.4% margin implying at mid-point 2025 sales and EBIT 1% above consensus. There is no sign of variance of organic inflexions by division vs previous statements: strong avionics including IFE recovery, strong OEN volumes in space but a still weal geostationary satellite market, increased capacity meeting strong demand in Defence, positive momentum in Cyber and Digital. Note that net income will include EUR88 of exceptional tax surcharge. Thales has proposed a dividend per share of EUR3.7, maintaining its 40% payout, as expected. There is no further indication on cash allocation. Net is a solid release that does not bring too much surprise. It...
• We leave our (rather above-guidance) revenue and EBIT forecasts and Buy rating unchanged ahead of FY Results on 4 March, but cut our price targets c.13% to reflect likely structurally higher long-term French tax rates.• We are inclined to see the company’s underwhelming new medium-term guidance (annual revenue growth 2024-28 of 5%-7%, and margins of 13%-14%, little changed from current levels) as somewhere between low-balling and frankly unnecessary risk-aversion, and at odds with the company’s increasing financial and industrial strengths.• The company has a record defence backlog (est. nearly €40bn at end-2024e, c.4 years’ of cover), Europe- (and, in some cases World-) leading defence technology (especially radars, electronic warfare, secure communications and naval systems), and a book to bill that has averaged >1.3x for the last 4 years.• Thales should be doing really well given the acceleration of European defence demand, and its especially strong positions in air defence and on Dassault combat aircraft. But its Defence guidance is close to the bottom end of its European peers.• We see the Avionics sub-division as another jewel, with unparalleled positions on Airbus, now clearly the leading (and near-dominant) civil aircraft producer.• But both Avionics and Thales’ newly-defined cyber activities are held back in divisional revenue growth terms by a structurally-wounded Space business, and banking, payments and biometrics activities that are, at best, highly cyclical, and potentially in longer-term structural change and/or decline. Further portfolio rationalisation could in our view release significant upward re-rating of Thales’ higher-quality businesses.
After another strong year in 2024 with 20% outperformance, the AandD investment proposition looks a bit more complex heading into 2025 and requires differentiation. In our annual review of the key sector debates, we aim to identify stocks with the best combination of value potential and momentum appeal. We reiterate our Defence push initiated in Dec and upgrade Thales to O/P and BAE Systems to Neutral. We stay positive on Rheinmetall, RENK, Dassault, as well as Airbus, Safran, MTU in Civil. The never-ending execution recovery - civil momentum cooling down a bit We see a quieter set-up in 2025, with continued recovery from execution difficulties. We expect a progressive shift of focus from engine ramp-up difficulties to execution in Aerostructures. We still see value in the segment: we reiterate our preference for Airbus and highlight long-term visibility at Safran and particularly positive momentum at MTU this year (FX, CMD, GTF normalisation). A busy year for Defence - value profile with many catalysts We double down on our December Defence call detailed in Another line of defence. We expect a particularly busy year, likely to confirm a sustained upturn in defence spending. This will be significantly influenced by the US geopolitical stance. The June NATO Summit is a potential key catalyst to see new defence spending commitments among member countries despite obviously complex budget equations. A possible ceasefire in Ukraine could provide an entry point. March to the sound of the guns - Thales raised to O/P with a TP of EUR176 (up from EUR156) Thales shares underperformed AandD by 20% in 2024. We think its value case now stands out, with an EV/EBIT multiple at a peak discount vs sector despite visibility on record organic growth rates driven by strong security needs in all its end markets, reducing ESG discount, and momentum that should reverse in 2025. Thales should benefit from solid leverage to the NATO defence spending hike (with no exposure to...
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What happened? Thales is holding a long-awaited capital market day today and released pre-market its set of new financial targets for 2028. The company targets: . Organic sales CAGR 2024-28 of +5-7%, of +6-7% in Defence, 5-7% in Avionics, 2% in Space and 6-7% at DIS. . EBIT margin of 13-14% in 2028, with Defence at 13%, Avionics at 13-14%, Space at 7%, DIS at 16-17%. . Average FOCF conversion of 95-105% over the 2024-28 period. Thales'' release also clarifies the group''s cash allocation policy with a 40% payout ratio maintained, a focus on organic growth, deleveraging and a selective acquisition to continue. Thales says that it will consider share buy back to prevent excessive deleveraging and if the Group''s valuation suggest it. BNPP Exane View: At first glance, Thales set of new target looks very much in line with expectations (we expected group organic growth at 5-7%, 13-14% EBIT margin and 100% of net income to FCF conversion), whether on our forecast or consensus. There is especially no significant variance vs recent management comments about divisional outlook, but rather continuity as visibility is provided into 2028 vs 2027 ambition for some elements. Space margin ambition especially has been updated from ''towards 7% in 2027'' to 7% in 2028. DIS sales and EBIT targets have been moved from 6-7% 2024-27 organic CAGR and 16.5% margin in 2027 to similar numbers into 2028 (with a slightly wider EBIT margin range at 16-17%). Defence and Avionics metrics are also very close to expectations. If any, we could see a minor disappointment from some investors on Thales'' tone as regards cash allocation, with no clear commitment at this stage to return cash to shareholders (to be fair, we did not expect any today). We assume that one of the topics of the management QandAs today will be on the definition of what Thales may consider as ''excessive deleveraging'', the pace of external growth to come, and as a consequence the timing when Thales may start...
All to prove• With organic sales guidance of 5%-6% for 2024e, and “mid-single-digits plus” guidance for medium-term, Thales has the slightly uncomfortable position of appearing to be one of the very slowest-growth defence companies in our European coverage.• Even if, as indicated by the CFO on the 9-Month Orders & Sales call, defence sales should be able to sustain medium-term organic growth of 6%-7%, this sits strangely with such strong continued Defence order intake: up 40% yoy in Q3, and an overall Book to Bill that has been running at 1.25x since the Russian invasion of Ukraine.• It remains possible that the company would prefer to under-promise and over-deliver, hence the low guidance. It is also possible that management is much more concerned about French domestic politics, and risks of higher taxes and lower defence spending – the upcoming CMD is a key opportunity to explore such issues.• Our view is that far more of Thales’ defence business is now international, and that European rearmament is likely now a decade-long process, for which Thales is as well-positioned as any. We have therefore upgraded our Defence forecasts to an average 12% revenue growth annually to 2029e, with EBIT margins reaching 14%.• Our slightly increased overall forecasts, and the passage of time along our target price track since our 24 July note (Thales: Flywheel) we increase our 1-year target from €186 to €202, and our 3-year target from €236 to €254, and retain the Buy rating.• Next event: Capital Markets Day, 14 November
We have adjusted our quarterly estimates ahead of the company''s release of its Q3 sales and orders on October 23. We do not consider the changes to be material; our rating is unchanged.
Thales’ book to bill has been above 1.0x since the end of 2020, and above 1.2x since 2022 Q2; we calculate the company’s defence backlog has increased by one third since end-2021. But organic revenue growth has remained stubbornly in mid-single digits over the period, highlighting the company’s higher proportion of mid- and long-cycle defence exposure.H1 Results were broadly in-line, but unexciting, the call low energy, and the 45% increase in working capital build had been poorly flagged (thanks, ESMA). With some deliveries (e.g. for the UAE Rafales) extending to the end of the decade, management appears reluctant to raise medium-term guidance at this stage of the year, but a tightening of FY guidance, rather than a full-blown increase, was clearly a disappointment for investors. Q3, and the 14 November CMD are key next dates.Near-term, both Thales (and key shareholder Dassault) appear very concerned (and, arguably, over-focussed) by the state of French politics, and the uncertainty over the political colour and policy direction of the new government.We argue that this overlooks the importance of (and momentum from) both Rest of Europe and Middle East/Asia, each of which have built larger backlogs than France.We increase our revenue and EPS forecasts by an average of 3%pa to 2028e, but our EPS forecasts by 5% pa and DPS by 9% pa.These increases, plus the passage of time along our price target track, drive an increase in our 12-month price target from €167 to €186, and our 3-year target from €215 to €236, We retain our Buy rating.
Organic strength offsets Space turnaround investments Thales released H1 results very close to expectations, with strong orders (B/B at 1.17x excluding DIS) and sales and EBIT bang in line with our forecast. By business, a slight miss in Aerospace (pressure in Space) was offset by solid delivery in other businesses and a beat in the Eliminations line. Space''s weak EBIT reflects a peak in RandD spending and restructuring charges (in H2 this year) related to a restructuring plan announced a few weeks ago. FCF miss from safety inventory build-up and orders mix FCF reached EUR-85m (including Transport) vs consensus at EUR350m. This miss reflects order mix, with European customers paying little or no downpayments (F126 German frigate), and efforts to mitigate supply chain concerns through additional safety inventories. The reiteration of the FCF conversion (100% of adjusted net income, excl. Transport) on this point is a positive. Outlook fine-tuned, with a slight change in mix FY sales and EBIT guidance have been narrowed. Consensus EBIT remains aligned with the top of the guidance, which we don''t see as a problem. Within this, Thales has cut its outlook for its Space business from small negative EBIT to about EUR50m negative EBIT this year. This should be offset by better sales and margin in avionics and Defence and Security. Earnings and valuation We have fine-tuned our forecasts with a marginal change in divisional EBIT forecast this year and a reduction in the time discount of our SOTP, underpinning our small target price increase (from EUR152 to EUR156). Despite a significant share price pullback today influenced by increasingly difficult momentum for defence names in the stock market, we do not see a reason for alarm here. The next catalyst should be the company''s CMD (Nov 14), which should feature a new set of midterm targets and a strategic update.
We feel increasingly confident that Thales will raise 2024 guidance, most likely at the H1 stage – a 24-month rolling average book to bill of 1.30x (>1.40x for Defence) means double-digit revenue growth looks a real possibility into the medium-term.Defence was the standout performer for Q1 orders: €3.1bn of orders, B2B 1.35x, was nearly double either our or consensus expectations, and the strongest Q1 since at least 2009.The large (>€500m) Indonesian Rafale equipment order was known, but the Middle Eastern air surveillance system order was far bigger than we had expected – over €500m. And we continue to be surprised at Thales’ high unit value on the ASTER air defence missiles – running at around €350,000 per round for seeker heads and possibly fuses as well. Defence also provided all the revenue beat in the quarter. Thales’ CFO was predictably cautious about extrapolating this to FY numbers, highlighting possible cutoff effects in Q1, and ongoing engineering and supply chain challenges. But the breadth of the strength across all business areas in Defence & Security at present makes this feel overly-cautious to us.Digital ID remains a Curate’s Egg: reasonable growth in Digital offset by a bigger than expected fall in smartcards (both for banking and SIM cards). We are slightly surprised at the guidance for Imperva revenue to grow “close to double digit organic growth” in 2024 – this low rate does not seem to us to justify the €3.6bn price paid for c.€500m of revenues.
Airbus continues to impress, Boeing under pressure on the 737 MAX We expect continuing acceleration of Airbus deliveries in March, with 71 units in the month (up 10 y-y, up 22 vs Feb 2024), bringing Q1 deliveries to 150 aircraft, vs 127 in Q1 2023. The y-y Q1 increase mainly stems from the A320neo (17 more aircraft, with fairly stable mix, and no sign of drag from PW1100 engine availability), with A220 and widebody aircraft up 3 aircraft each. Boeing deliveries are expected to be under significant pressure, with only 31 units expected in March (vs 64 in March 2023), including a drop from 53 737 MAX in March 2023 to only 25 units last month. This should bring Boeing''s Q1 deliveries down 36% y-y to 83 units. We expect Airbus Q1 EBIT up EUR250m-300m in civil aircraft We expect c.EUR850m-900m of Q1 adj. EBIT at Airbus''s civil aircraft business, up c.EUR250m-300m y-y. This should reflect an 18% increase in y-y deliveries, with fairly stable mix. We took a conservative assumption on leverage on fixed costs given the company''s ongoing policy to front-load its ramp-up costs in order to derisk its target production rates into 2026, underpinning lower than usual productivity, which should recover when rates stabilise. We also expect a neutral impact from FX (hedge rate guided at 1.22 in Q1 24, similar to Q1 23) and a marginal increase in RandD. Engine makers: strong momentum at Rolls, MTU; Safran''s mix likely distorted by the MAX We note a strong difference in momentum of installed engines deliveries, with strong trends at Rolls (up 51% est. in value in Q1) and MTU (+26%) vs a 25% est. drop at Safran in Q1. While obviously not a positive for Safran over the long term (postponement of aftermarket flows from deferred new engines), this should drive strong mix at Safran in Q1, with less dilutive OE deliveries and an opportunity to ship more spare engines in the near future. The longer-term impact of the production cap set by the FAA on the Boeing 737 MAX should...
2023 results at a glance Thales FY results provided comfort on a number of fundamentals for Thales. Order intake environment was very supportive (with a surprising raft of large orders in Q4 2023). Growth remains strong despite being sometimes curbed by supply chain ramp-up ability (Defence, Space especially). FCF conversion of earnings continues to impress. Thales also reported on pressures seen in Space, at DIS and on net debt (EUR840m higher than expected post the outsourcing of the company''s UK pension liability), which should allow for a necessary rebasing of consensus. Model reviewed post 2023 results Our EPS cut reflects a trimming of our EBIT by c.3% as well as higher net financial expenses, consistent with higher-than-expected net debt. Our 2024 forecasts stand slightly above the mid-point of the group''s sales and EBIT margin target ranges (EBITA of EUR2.37bn). Beyond, we model a 5% top-line CAGR until the end of the decade, with an EBIT margin exceeding 13% from 2027e and a slight erosion of FCF conversion as the company enters into a phase of execution of its backlog (Rafale especially, as we conservatively exclude new orders from our model). An equity story based on sovereign critical technologies more than Defence Comments from Donald Trump on the campaign trail have renewed fears of a possible disengagement of the US from NATO and driven a new focus on the need for self-reliance of European countries to preserve their safety. This has lifted defence shares faster than we expected. Thales positioning, however, remains hybrid, with about half of civil sales post acquisitions of Imperva and CAC. The challenge for the group remains to redefine its equity story, especially at its November CMD. An option in our view could be a shift in the company''s brand image from Defence to a broader definition of Security, parallel to the extension of the conflict domains in modern warfare, with a leadership position on sovereign technologies...
With Trump on course to secure the Republican nomination, US elections are emerging as a key sector theme for 2024. Both civil and defence could be affected, mostly via tax and NATO positioning. We see BAE Systems (-) and Leonardo (-), and to a lesser extent Dassault Aviation (=) and Rolls (=), as most exposed. Please see today''s x-sector report: Trump Season 2. Trump pressure could see ex-US NATO spend rise 20%... The US elections have impacted European AandD corporates much earlier than we expected this year, with Trump''s comments around NATO sparking debate over the future of defence budgets. While we see little impact from the election result to US defence spending, a Trump victory could clearly lead to increased pressure on other NATO members to up their spending. We calculate that if all ''laggards'' upped their spend to 2% of GDP, total ex-US NATO spend would be 20% higher. ...But could still go higher if the US pushes for a 2.5% of GDP floor The catch-up trend is already under way, however, and 20% growth is already reflected in many defence budget plans. NATO estimates that the number of countries above the 2% threshold will increase from 11 to 18 in 2024. The real issue then is whether this threshold could rise further to 2.5% or beyond - a level that could drive a real step change in European defence spending. BAE Systems, Leonardo and Dassault Aviation are most exposed to defence spend, though the latter''s gearing to NATO spend is diluted by EM exposure. Tax a potential material bonus for US civil earnings streams More corporate-friendly tax policy - notably through a potential extension of the bonus depreciation scheme - could offer strong support to the US-based industry. This would clearly benefit Dassault Aviation (US is still the dominant business jet market), but BAE stands out with the highest US footprint in the sector. Leonardo and Safran may also benefit from any specific support to Boeing. We also stress that tariffs should not be...
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After 20% outperformance in 2023, AandD looks like a more complex investment proposition in 2024. We have completed our annual review of the key debates, aiming to identify stocks with the best combination of value potential and momentum appeal. We reiterate our preference for Airbus, Safran and Rheinmetall (all rated Outperform) and downgrade Defence stocks Leonardo and BAE to Underperform and Thales to Neutral. We upgrade MTU to Outperform. Entering the ''new normal'' territories Days of recovery from the covid era are behind, the initial volatility in Defence around Ukraine is also cooling down. After an eventful 2023, 2024 should mark the sector''s entry into a new business paradigm, with the relative return of visibility, stabilizing demand and cost environment, improving supply chain and mostly stable product ranges. This could be the occasion for several corporates in the sector to define their long-term potential under this ''new normal''. Momentum cooling on Defence - Leonardo and BAE downgraded to (-), Thales cut to (=) The world is a dangerous place to live in. Affordability of the increased defence effort remains a debate, and while we doubt material additional funding will be committed on top of the multi-year investment plans of 2023, this discussion is likely to resurface at the first sign of easing of international tensions. With well identified growth, increasingly demanding valuations, and slowing momentum, we reduce exposure to Defence and downgrade Leonardo and BAE Systems to Underperform, and Thales to Neutral. On the mid-cap side, we confirm our (+) on Rheinmetall. MTU raised to Outperform Putting on our risk-on hat we have revisited the mid-caps of our sector. While we recognize the long-term potential on Dassault Aviation, we see c.18% downside to consensus EBIT 2023-25e and stick to our Neutral stance. For MTU, though the situation on the PandW production issues remains fluid, the progressive increase in visibility is reinforcing...
Thales published 9M results in line with market expectations, having benefitted from the strong momentum in avionics, accompanied by a robust performance in D&S. DIS saw mixed figures, with a collapse in the payment and sim card businesses offset by a solid performance from the biometric and cybersecurity activities. Given the good performance in 9M, Thales has re-iterated its FY23 guidance.
Thales has published H1 23 figures above our expectations. Order intake stood at €8.6bn (+5.2% vs AV) and sales at €8.7bn (+1.4% vs AV) while the underlying EBITA stood at €993m (+1.3% vs AV). However, after 5 exceptionally strong quarters, the DIS segment experienced a pricing headwind, which we believe will continue in H2. The company has marginally upgraded its guidance to +5-7% yoy organically (prev:4-7%) but, considering the latest FX rate, the absolute figures lie slightly below our current estimates.
A fairly good set of H1 numbers Thales released a set of H1 results which was fully in line with consensus. Orders, sales and EBIT all came within 1% of consensus, with a bigger beat on net income (7% better) due to stronger net financial income. We highlight that the quality of earnings however looks good, with a strong organic contribution (40% conversion of incremental sales into underlying incremental EBIT), offset by higher reinvestment in RandD, marketing expenses and GandA, which we see as very favorable mix. Guidance mostly unchanged, cyclical excitement cooled down Thales'' FY guidance has been marginally amended, with a slight increase of the bottom end of its organic sales growth range target (from 4-7% organic to 5/7% organic growth). FX headwind and perimeter change have slightly impacted the conversion of this organic ambition into actual revenues, with a sales range of EUR17.9-18.2bn targeted for 2023, vs EUR18-18.5bn previously. This is slightly below consensus at EUR18.3bn for 2023 sales. Consensus is today at the top of the EBIT guidance implied and we don''t expect significant consensus EBIT revisions. Besides, the cautious message on DIS profits into H2 after a very strong H1 (due to normalisation of pricing, and the end of some volume catch up effects) came as a disappointment to some investors betting on cyclical upside to the name. Model fine-tuned, equity story virtually unchanged We have fine-tuned our divisional forecast for this year, with very limited impact on our 2023-24 estimates and valuation. Fundamentally the story is unchanged, with a recovery of civil businesses post covid and a mid-term defense outlook supported by a general reinvestment in military equipment at NATO countries. This should contribute to strong top-line momentum over the next decade for the group (possibly to be clarified next year by the company), not fully reflected by Thales'' valuation today. Catalysts however are now scarce, as reflected by...
Who''s up for a guidance increase? Civil aerospace has benefitted from solid momentum in H1 as investors played through the sector an acceleration of the air traffic recovery boosted by the reopening of China. This fed hopes for guidance upgrades, which were cooled down by some cautious messages on the near term at the Paris Airshow. While we see a few companies being ahead of their FY trajectory (Airbus on deliveries and cash, Safran probably on aftermarket and cash), activity elsewhere is expected to be a bit more backloaded than initially expected (Thales Defence and Space revenues, Rolls'' flight hours, shop visits and deliveries, Safran in Interiors, MTU with Q2 aftermarket). This means that most guidance will now probably stay unchanged (except maybe for FCF), at least until Q3 reporting. Who can surprise positively? Engine makers probably offer a more attractive set up into H1 results. We see a good chance for Safran to announce an inflexion in its cash allocation strategy. While expectations on its Q2 spare parts growth are now low, MTU could surprise positively if it can convince the market of a re-acceleration of its spares momentum into Q3. Some progress on LTSA contract renegotiations at Rolls-Royce, reflected by the release of some provisions for onerous contracts, could also be viewed favourably and as a sign of real transformation of the group. Who has momentum into H2 2023? Despite some adverse currency momentum, the AandD sector is screening favorably among industrials due to a combination of still affordable valuations and high topline visibility, while confidence on order momentum is waning elsewhere. Specific catalysts are rare however, with an unusually low number of CMDs in H2 this year (Rolls-Royce in Q4). Against that backdrop, Airbus'' monthly deliveries are likely to remain a focus for investors as they will demonstrate a continuing supply chain execution recovery. Airbus remains therefore a sector play of choice for...
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Thales has entered into exclusive negotiations to acquire Cobham Aerospace Communications, a supplier of advanced safety cockpit communication systems, for $1.1bn (financed in cash). At 17x EV/EBIT multiple, the deal is expensive but, with the company’s unique offering, better margins and vertical integration, we believe that Thales has struck a great deal.
Our trip to the Airshow involved 25 management meetings, including Airbus, MTU, Rolls-Royce, Safran and many of their suppliers. In this report, we provide the key takeaways. Please contact us for more detailed feedback on stocks of interest. A show that delivered on its promises The raft of orders at the show (especially at Airbus) confirmed the strength of OE demand, the strategic role of the Indian market, the domination of the A320neo economics and the beginning of a widebody recovery. The shift to the right of potential new product launches (A220-500, NGSA) bodes well for longer life expectancy of some existing platforms, adding further visibility. More signs of strength on the volume growth stories Airline spending is recovering fast ahead of a busy summer. This should support some increase in engine shop visit workscopes and positive pricing dynamics across the board, underpinning a series of guidance upgrades (Melrose, MTU) in aftermarket. Execution in the supply chain continues to slowly recover with the main concern now the availability of PandW engines into 2024. But don''t overlook signals of upcoming margin development The show revealed many signs of a durable inflexion in civil aerospace profit dynamics. The slowdown of the RandD cycle should cap the spending upturn. Productivity improvements and absorption of fixed costs should continue to support margins in 2024-25. Finally, we felt that pricing and net escalation will probably act as a tailwind for the years to come at the key decision-makers. Civil aerospace, our preferred segment for the next 12 months Short-term investors may see fewer immediate civil catalysts now that the show is past, barring guidance increases and possible buybacks with Q2 results (Safran). Airbus improving monthly deliveries may still be small positive catalyst into H2; fears of a miss to its 720 deliveries target have reduced. The show confirmed that the sector is heading into years of very strong cash...
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Your toolbox for the first Paris Airshow since Covid The Paris Airshow will start on the 19th of June. With 4 CMDs and plenty of corporate meetings ahead, it is a unique occasion to get a view of trading conditions and mid-term challenges in AandD. In this note, we review the key points of debate and provide topics of discussion with the 16 corporates we plan to meet. Airbus remains our preferred name into the event. Key topics of debate expected at the show The airshow, which is a few days after the AGM of the airlines'' trade federation IATA, should confirm the strength of the airline industry''s recovery. This should materialize in a decent flow of orders, driven by both increased fleet capacity and aircraft replacement of narrowbodies but mostly widebodies. In our view, the focus of investors should, however, lie elsewhere: trying to gauge the evolution of the execution environment in the supply chain, and the gradual reduction in hurdles hindering aircraft production and aftermarket ramp-up. The challenge of improving new narrowbody engine durability, especially in harsh environments, should be another important point of debate. We review these in detail in this report. Stocks to own into the event A key execution challenge today lies at Airbus. However, we expect the group to demonstrate some progress on regaining control of its supply chain, which should allow it to reiterate its deliveries target for 2023 and ramp-up plans for the following years. The investor event to be held by Airbus on Wednesday 21st should be a high point of the show. We continue to be convinced that the aftermarket environment remains extremely favourable, but that bottlenecks in MRO networks will probably stretch the recovery over several years. This shouldn''t prevent a number of players from raising guidance though. Against that backdrop, Safran remains our preferred aftermarket play, especially given the lower level of risk that we perceive on the profitability...
Thales published good Q1 sales figures of €4.03bn (+7.9% yoy and +2.5% vs consensus). Sales were largely driven by the civil side, in particular, civil aeronautics (ongoing traffic recovery) and biometrics. The orderbook grew by 14%, driven by the defense business. The company remains confident that it can achieve its full year target and hence has left its guidance unchanged at 4-7% organic growth with a 11.5-11.8% EBIT margin.
As the AandD Q1 season kicks off this week, we summarise in this note our expectations for key names in our coverage. Execution environment to be the key topic of focus for Q1 across the sector Concerns around cost inflation that dominated the sector at the end of last year have dwindled after players, bar certain isolated cases, demonstrated solid cost control. The attention has now shifted to execution and corporates'' ability to meet the strong levels of demand amidst a difficult operating environment and a stressed supply chain. This is notably a topic at Airbus, for which we will look for a confirmation of improving control of execution, with better anticipation and adaptation to supply chain delays, as well as explanations of the especially low output of A350 aircraft. Civil: Airbus and Safran, our preferred picks to play earnings After a strong run for engine makers (Safran +21%, MTU +20% ytd), Q1 will see the focus maintained on cyclical aftermarket recovery potential (with strong mix expected at Safran, and clarifications from MTU on the drivers of its pre-announced Q1 beat), supported by strong traffic, depleted ''green time management solutions'' at airlines and despite supply bottlenecks. Their equity story, however, is gradually shifting to longer term trends, and especially the growing contribution of new engines (LEAP and GTF) in the aftermarket mix (read for details: SAFRAN (+) : Leap vs GTF: the reliability game is on (25)). We think this is starting to prompt a repositioning of investors into Airbus which lagged the civil aero stock market recovery and benefits from improving momentum on execution. Defence: a trade that has played out well We started the year pushing Defence names in the run up of key defence budget milestones. We see little at stake on their Q1 earnings, following a strong run of the sub-sector year to date and given Q1 is usually a non-event for defence names. We see Leonardo as being relatively weaker into...
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Thales published good FY22 figures with sales and EBITA both in line with the consensus and FCF beating the market expectations. However, the company has given dull guidance for FY23, with FCF even below the market consensus. This comes as a negative surprise given that the sector has entered a new super-cycle with the onset of the war and a sharp recovery in civil traffic.
A strong set of results with notably an impressive FCF Thales reported a solid set of H2 results. Order intake came 14% above consensus, sales were in line with consensus (with a slight beat in DIS offset by a slight miss in DandS), similar for EBIT (composed of a 15% beat in DIS offset by slight miss in Aerospace and DandS). The highlight of the print was the impressive FCF, which came EUR900m above consensus for the full year, driven by 1) strong order intake on exports markets 2) phasing of cash inflow on contract execution 3) internal efforts to support cash conversion. Guidance overall line with expectations The headline guidance for 2023 was very much in line with consensus expectations, landing in the middle of the range for sales and EBIT, with slightly softer DIS growth but good profit recovery in Aerospace and Defence. Unlike usual, Thales also released a clear FCF target, with a 2021-23 ambition at EUR6.5bn (implies 1.4-1.5bn in 2023), slightly lower than consensus despite the strong FCF beat of 2022. Thales also exceptionally provided divisional granularity for 2023 and 2024 which point to margin recovery slightly faster than what we saw in Aerospace for 2024, and slightly softer sales at DIS. The equity story is not over A poor share price reaction on the print reflected unfavourable positioning, with some investors keen to take profit after a good run of the share, while no big negative was identified in the release. The story has further way to go though. There are macro catalysts ahead for the defence sector that will benefit Thales (release of detailed European defence spending plans, NATO Summit), and good exposure to potential large orders (Rafale) that can further support its cash generation. Also, the equity story is slightly changing in our view: the demand environment is clearly supportive, and Thales ability to show faster sustainable earnings growth will partly be conditioned to contain supply chain ramp up difficulties....
AandD outperformed by 25% last year, helped by Defence asset re-ratings. Investing in AandD in 2023 is a more complex proposition. We have completed our annual review of the key debates, aiming to identify stocks with the best combination of value potential and momentum appeal. We still see strong value across the sector and select Thales (Once upon a tank), Rheinmetall and Safran (Fans of the engines) as our preferred plays. Momentum still favours aftermarket names - Safran at the top In our view, the cyclical optionality this year will come from potential beats in aftermarket sales: we see the plans for c.20% aftermarket growth in the sector as conservative given the pricing tailwind and catch-up in airlines'' deferred spending. Safran is the best exposed to this trend in our view, both in terms of positioning and valuation vs its direct peers. While still a complex case, Rolls-Royce (upgrade to Neutral) is now a more balanced risk/reward proposition. While still exposed to positive momentum, we remain more cautious on earnings and valuation at MTU (cut to Underperform). Betting on a valuation anomaly in Defence - Thales preferred defence play The valuation disconnect between European and US Defence assets is in our view bound to partially unwind from a historical peak. With unfortunately no end in sight to the Ukraine conflict, we think improving visibility on NATO spending upturn and potentially clearer ESG regulatory context will support this unwind. Thales is our preferred play due to strong sales outlook, cost/cash control and affordable valuation, ahead of Rheinmetall (German spending momentum) and Leonardo (strong upside, high beta). We cut Dassault to Neutral as it starts the execution phase of its order rebound. The complex Airbus case Airbus remains a complex case of strong value appeal based on its domination of the narrowbody market and a particularly adverse near-term momentum as ongoing execution difficulties, rooted in supply...
European Defence has missed the start of the year''s market rally. Its valuation exhibits a strong gap vs US peers and European cyclicals. With a busy pipeline of favourable newsflow ahead, bringing back the attention on NATO''s spending upturn, we expect this valuation gap to close and see Thales as the best vehicle to play the theme. The comeback of the Europeans The valuation gap between European and US Defence stocks has reached the unprecedented level of 35% on EV/EBIT. European defence valuations do not reflect, in our view, the sustainable organic upturn of military expenditure at NATO countries, and subsequent improved cash flows and cash return potential at European contractors. We believe the adverse momentum observed in Q4 22, based on the hopes of a ceasefire in Ukraine, a transition period in political planning of defence spending and the lack of development on the ESG regulation front as having weighed on European Defence share prices. Adverse momentum likely to reverse The line-up of upcoming catalysts is however rapidly growing. Details on the next French military programming law are being released earlier than we initially thought, with additional defence milestones expected in the summer, implying that the defence planning transition is coming to an end. Combined with exports order potential and possible developments on the ESG front, we think this can revive investor interest for the defence sector. Thales, the main character of the Defence story We believe that Thales offers the best combination of positioning (strong exposure to Defence, and especially France), track record of execution and valuation to address the re-rating of defence assets, as we flag today in our sector piece Flight 2023. Thales notably trades at c10x EV/EBIT 2024, vs 11.8x for its direct peer BAE Systems. With significant favourable newsflow ahead, both sector-wide and stock specific, we view Thales as our preferred defence play for 2023.
Our Defence ESG Summit, organized on Nov. 8 with the ASD, gathered 22 experts to review key controversies limiting fund flows into Defence and how to address them. Here are the main takeaways. Our ESG ratings remain unchanged. New stakes for the ESG debate in Defence Recent geopolitical events have changed the terms of the Defence ESG debate, which we discussed in our two most recent green books The kiwi syndrome and Defence, you have the floor. The shift of financial markets to ESG investing is impacting the defence industry on many fronts: access to capital, export financing, or simply attractiveness on the job market. Investors are under pressure to build an educated opinion on the investibility of a complex sector. Four controversies analysed in depth We asked our experts to address four controversies to help rebuild the sector''s ESG credentials: product policy, nuclear deterrence, exports controls and anti-corruption practices. We especially focused the debates on the definition of regulatory environment, best practices, concrete challenges faced by corporates and ways to improve regulation and disclosure. The aim is to define methodologies that would provide sufficient comfort on ESG credentials for investors to legitimate their investment in defence. Next steps of the debate In conclusion, we believe that the stakes of the Defence ESG debates are significant, and that the current environment remains adverse to ESG investment in the Defence sector. There are, however, real opportunities to improve the situation and a few elements all stakeholders should lobby for. First and foremost would be increased clarity of European ESG regulation. Next would be increased oversight and transparency of military exports systems. Further disclosures from the defence industry on the key topics of exports management and anti-corruption practices could also help, which seems achievable given the strong ambition expressed by the defence industry at our...
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Thales published a solid set of Q3 results. The strong momentum in order intake continued in Q3 and sales increased strongly thanks to outperformance from the DIS activity. The company increased its FY22 sales guidance and reiterated its EBIT margin outlook. Thales seems well positioned to show resilience, even in a recessionary environment.
Thales has published robust H1 results. The massive Rafales contract has been recorded and pushed the order intake to a new record, boosting FCF with the downpayments associated with it. The improved guidance is mainly due to FX, and the organic sales midpoint has only improved by 50bp, which is in line with our view. Thales is still committed to bolt-on acquisitions of less than €500m, but does not totally exclude Atos.
Thales Q1 figures came as no surprise to the market. Despite the contract wins in space, the commercial traction for the other business divisions has been slow. As it will take time for governments to organize and place orders for Thales solutions, the FY22 guidance remains unchanged, which is a slight disappointment. Although the mid-term fundamentals of Thales remain exceptionally strong, we believe most of the positive dynamic has been already been factored into the stock price.
Thales has reported strong Q4 results, with the order intake at its highest level and strong cash generation. It has resulted in the first share buy-back programme in Thales’ history. The given guidance was a disappointment but does not encompass the major momentum that Defence companies have been witnessing in the current days due to the intensifying Ukraine/Russia war. Though the short-term consequences will be shy on financial figures, the long-term growth of the stock is unquestionable.
Thales has provided solid numbers which were globally in line with consensus. It has confirmed its new guidance (without the Transport division), where it seems well on track to achieve it. Overall, we are still impatiently waiting for an M&A opportunity to see which sector Thales will reinforce.
In 2016, the French group DCNS (currently known as the Naval Group) had won the largest contract in the history of Australia with a value of AUD90bn worth of conventional submarines. After five years of escalating tensions between the Australian government and the Naval Group due to technical issues, the Australian government announced today that it would drop the Naval Group in favour of a new alliance with the US and the UK.
After months of rumours, Thales finally found an acquirer of its Ground Transportation System business: the Japanese company Hitachi. This transaction will be paid in cash and the business will be considered as a discontinued operation for FY21. Therefore, guidance has been re-adjusted.
Thales published a solid set of results for its H1 this morning. All key figures are above consensus: order intake, sales, EBIT and FCF. Its guidance has been improved and the range is now more precise.
The return to growth of Thales is warmly welcomed by investors. The order intake was higher than expectations and proves that a recovery is in place. FY21 is expected to be a great year for Thales, with all sectors improving with time.
Results came in line with expectations, with still good commercial momentum and a major positive surprise concerning cash generation. Guidance points towards a return to growth in 2021, matching expectations. Buy recommendation reiterated.
