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Boosted by Defence & Security
29 Feb 16
h1. Headline figures Thales posted a record order intake at €18.9bn, up 31% from 2014. Thales, most importantly, returned to organic growth for the first time since 2009. Sales grew 8% to €14.1bn, up 4.5% at constant scope and currency. EBIT also exceeded guidance and consensus expectations at €1,216m, up 23% from the €985m, and resulting in an EBIT margin of 8.6%, up from 7.6% in 2014. As a result, the adjusted net income was up 44% to €809m. In addition, FOCF doubled to €1.1bn as working capital moved favourably and the increase in capex to support future growth remained conservative. EBIT conversion to cash flow stood above 91% for 2015 resulting in the cash position improving to €1,978m from €1bn. Thales has opted to raise its dividend by 21% to €1.36, maintaining its 35% payout ratio to adjusted net income. In terms of targets for 2016, Thales now expects mid single-digit organic sales growth and EBIT to stand in the range of €1,300-1,330m. The medium-term guidance has also been raised with Thales now expecting organic sales growth in the mid single-digits in both 2017 and 2018 thanks to the solid acceleration in order intake over the last 2-3 years.
Strong order intake jump and guidance confirmed
21 Oct 15
Orders over 9M 15 totalled €10.3bn, up 37% yoy so that Thales’ order book now represents more than two years of sales at €28.56bn. Aerospace orders remained stable at €3.15bn as space orders declined compared to an extremely positive year in 2014. Transport segment orders tripled to €2.5bn from €825m over 9M 14. Defence & Security stood at €4,642m, up +32% on 9M 14. The order intake over 9M has been particularly strong due to the high number of orders over €100m in value including three large scale space contracts (from the French Intelligence, European SA and Italian Space agency), and three large signalling contracts in the Transport division (Doha, Hong Kong and London). In defence, Thales has booked the Egyptian Rafale contract as well as Airport security contracts in Oman and the SV Scout contract in the UK. The order intake from emerging markets grew 42% to over €3.2bn. Sales over 9M 15 are up 9% to €9.1bn (+4% on a like-for-like basis and constant FX). Aerospace sales are up 9% to €3.58bn (+2% organically) thanks to favourable commercial avionics sales boosted by the addition of live TV in 2014 and revenues from Space activities following the significant orders in 2014. Transport sales are up 2% to €862m (-3% organically) as lower ticketing revenues were compensated by rail signalling revenues. Defence & Security sales are up 9% to €4.64bn (+6% organically). The segment benefited from the high level of activity across the board: in Defence missions systems with the Indian Mirage modernisation programmes and naval activities; Secure Communication and Information Systems segment revenues were boosted by growth in revenues linked to radio communications (France, the Middle East) as well as cyber security; and Land and Air Systems sales were driven by the ramp up of the Air traffic control programme in the UK as well an increased activity in the armaments and protected vehicle sub-segment. The guidance for the 2015 full year is maintained. With order intake expected to exceed that of 2014, sales are expected to grow low single-digit on an organic basis and EBIT to be in the range of €1.13-1.15bn.
Strengthening cyber security offering with the $400m Vormetric acquisition
20 Oct 15
Thales has announced that it will acquire Vormetric, a leading US provider of data protection solutions for physical, virtual and cloud infrastructures for $400m. Vormetric is based in San Jose, California, and will merge with Thales’ E-security business which also has an office in San Jose. The transaction is expected to close in Q1 16. Thales suggests that the EV/2016 sales stands at 4.3x for this transaction or 5.3x 2015 sales (estimated at $75m). Thales believes that Vormetric should be breakeven in 2016 and that the acquisition will be accretive starting in 2017.
Boosted by a sustainable return to growth in Defence & Security?
24 Jul 15
Thales released a set of very strong figures in H1 15 despite the continuing disappointment of the Transport segment and the willingness of management to remain cautious with respect to the second half of the year. This is certainly understandable given that Thales has traditionally been cautious when it comes to guidances over the last couple of years as it had to rebuild its credibility in the markets and the fact that this is Patrice Caine’s first year as Chairman and CEO and he doesn’t need to put himself at risk. The figures highlight a strong growth in order intake, sales as well as EBIT and FCF generation: Order intake grew 19% in H1 to €6.2bn. Sales were up 11% to €6.35bn (6% organically). EBIT up 18% to €473m (11% organically) up from €402m. As expected FCF was negative (typical seasonality) at -€304m but this is a significant improvement on the -€535m in H1 14 mainly thanks to the down payment on the Egypt Rafale contract. Thales has a solid net cash position of €614m which leaves room for M&A in the years to come, especially with certain Airbus assets coming up for grabs. Guidance has been maintained for an increasing order intake, low single-digit organic increase in sales and a progression in EBIT of 15% vs. 2014. The objective of reaching a 9.5-10% group EBIT margin by 2016-17 has also been confirmed. Looking at the various business segments: In Aerospace, the order intake was down 16% to €1.8bn due to lower bookings in Space as H1 14 was a particularly strong quarter for the Space business. However the trend in Avionics and IFEC (in-flight entertainment and connectivity) remains strong. Sales grew by 5% on an organic basis to €2.5bn boosted by increasing avionic sales, a solid performance from the aftermarket and the higher contribution from IFEC. As a result of these good volumes, EBIT came in at a strong €224m with Thales posting an 8.9% margin. Transport was the clear disappointment of this release, despite a very strong order intake of €1.2bn vs. €637m in H1 14. Sales fell by 6% organically to €569m (flat in absolute terms) and EBIT was a negative €39m (-6.9% margin) as the segment's new management team reviewed the contract portfolio and selected to downgrade the margin on a number of significant contracts (c.20% of the current revenues). Transport is now expected to be below breakeven in 2015 and gradually return to a normalised 5-6% EBIT margin by 2018 as these zero-margin contracts gradually come to completion. The Defence & Security segment was the very positive surprise in the quarter with order intake boosted by the Rafale contracts, up 22% on an organic basis to €3.15bn. Sales came in at €3.2bn, up +9% with solid activity thanks to the Indian Mirage upgrade, the strength in naval activity and the start of the defence Air Traffic Management contract in the UK. As a result, EBIT came in at €301m due to the favourable volume impact and good execution. This figure was slightly boosted to the tune of c.€15m by provision reversals on the completion of security contracts which implies that the underlying margin for the segment came in at 8.8% for H1 15 vs. 7.9% in H1 14.
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FY17 expectations unchanged. Interim dividend maintained
25 Oct 16
Interims reflect tough markets which impacted Technical. Shipbroking delivered a resilient result and Logistics has performed well. The interim dividend has been held at 9.0p. The group anticipate an improvement in H2. The Board’s expectations for the year are unchanged based upon the strength of the order book due in H2, its ongoing market coverage and the benefits of action taken previously. We have retained our FY2017 PBT forecast of £8.7m and a maintained dividend. We reiterate our Buy and adjust our TP to 450p.
Doing things differently
25 Oct 16
Growing pains have impacted on its operational performance (EBIT margins 5.8% FY15 vs 12.2% FY13) and the HSS Hire valuation is at distressed levels (price to book 0.4x vs 1.3x at the time of the float). As the top-line catches up with the expanded cost base and the roll-out of the NDEC leads to greater efficiencies, margins and returns will rebound. Historical experience has shown that price to book ratios typically match these improvements (see Ashtead FY08-FY15, price to book expanded +196%). Therefore, we see scope for material upside in the share price as the expected operational recovery to progress. Our 12 month target of 115p equates to a 0.8x price to net operating assets
Risks discounted leaving significant upside
18 Oct 16
FY 2016 sales grew strongly at +22% but EPS growth lagged at +3% (our revised forecast -1%) as staff attrition and significant investment in new services held back profitability. Conversion of profit into cash improved significantly, at 240% in H2, as shorter payment terms and a lower level of extensions also benefited. We make no major changes to our forecasts and reiterate our view that Utilitywise is at the forefront of a changing energy market, supported by investment in innovative technology. The current valuation is entirely focused on the short-term challenges and ignores the growth potential supported by the new services.