French electronics expert Thales (Fr: HO), named after the original Greek philosopher, is a rare breed. Organic sales at its core defence business, which accounts for about half the group's revenue and profit, actually grew last year, and orders there jumped 14 per cent. A new management team is improving margins through massive cost savings, and earnings growth guidance looks conservative. We think the substantial discount to rivals will inevitably narrow, perhaps as soon as next month given the potential catalyst of a major strategy presentation on 10 April.
- Major strategy presentation on 10 April
- 2013 results beat forecasts
- Heavy restructuring boosting margins
- Rapid growth in emerging markets
- Defence cuts
- Limited free float
Unlike many rivals, Thales' full-year results that were reported last month were free of shocks. In fact, an 11 per cent increase in organic adjusted operating profit to €1bn (£839m), and a 60 basis-point increase in margin easily beat consensus forecasts. Another €120m of cost savings and a 27 per cent dividend hike did, too. A measure of Thales' success perhaps is the disappointment at forecasts for profit growth of "only" 5-7 per cent, a figure rivals would envy.
Broker JPMorgan, however, still predicts earnings growth of 9 per cent in 2014 and strong double-digit increases for at least the two years after. Anyway, Deutsche bank attributes much of the guidance shortfall to a €35m hit from further weakness in both the Canadian and Australian dollar. It also reckons internal estimates are "conservative and could be beaten".
Much of the improvement in margin to 7.1 per cent (or 8 per cent under new accounting rules, which also deconsolidate joint-venture sales) is driven by a huge four-year efficiency push begun in 2010. Management expects another €80m-€90m of savings in 2014, slightly less than hoped for, but, again, certainly beatable given targets have been exceeded for the previous two years. Jean-Bernard Lévy, chief executive since 2012, predicts double-digit margins, similar to peers, in time.
That is all part of Monsieur Lévy's new masterplan - codenamed Ambition 10 - to increase sales by €10bn and margins to 10 per cent over the next 10 years. It looks a tall order and so far we have very little detail about how he plans to do it. That's why a capital markets day for analysts and institutional investors on 10 April is causing so much excitement. It's the first such meeting since 2010, and could act as a significant catalyst for the share price if number crunchers are convinced by the strategy beyond 2015.
THALES (HO) | ||||
|---|---|---|---|---|
| ORD PRICE: | €47.07 | MARKET VALUE: | €9.7bn | |
| TOUCH: | €47.02-€47.06 | 12-MONTH HIGH: | €49.90 | LOW: €30.90 |
| FORWARD DIVIDEND YIELD: | 2.9% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | €19.01 | NET DEBT: | €1.7bn | |
| *Includes intangible assets of €4.6bn, or €22.28 a share | ||||
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€m)** | Earnings per share (€)** | Dividend per share (€) |
|---|---|---|---|---|
| 2011 | 13.0 | 0.67 | 2.63 | 0.78 |
| 2012 | 14.2 | 0.87 | 2.86 | 0.88 |
| 2013 | 14.2 | 0.92 | 3.20 | 1.12 |
| 2014** | 12.8 | 0.99 | 3.48 | 1.23 |
| 2015** | 13.0 | 1.13 | 3.96 | 1.36 |
| % change | +1 | +13 | +14 | +11 |
Beta: 0.9 **JPMorgan estimates, adjusted PTP and EPS figures £1=€1.20 | ||||
Clearly, much of the plan's success will depend on faster-growing markets in Asia, the Middle East and Brazil. Significantly, Thales does comparatively little work in the US and last year new orders from emerging markets surged by 30 per cent to €4.6bn, a third of the group total. And Thales is better diversified across industries than most other defence plays.
Making cockpit electronics for Airbus commercial aircraft and in-flight entertainment systems for Boeing's 787 Dreamliner grew aerospace profit by a quarter in 2013, accounting for 37 per cent of the total. It should do again this year, according to JPMorgan, and achieve double-digit margins in 2015. Buying JetBlue Airways' in-flight satellite television business for $400m (£241m) looks a steal. Meanwhile transport, accounting for 10 per cent of group sales and profits, might do equally well. It's already landed big signalling contracts in South Africa, Egypt and China, and the Middle East is expected to sink $250bn into rail projects over the next decade.
