Thales: Less Dramatic for Now
The defence company Thales is expected to benefit from the shift in global defence spending, particularly in its key markets of France, the UK, and Australia. Thales has a strong balance sheet with a net cash position of €1.1bn expected in 2023. While the increased defence orders will take time to be reflected in the company's P&L, Thales' high net cash position provides room for shareholder remuneration in the form of an additional share buyback program or higher dividend payments. The company is also expected to have high single-digit organic growth from 2024 onwards.
All the companies in the defence sector have rallied significantly since the day the Russia-Ukraine war broke out but the growth has seen substantial differences. In the AV universe, Rheinmetall has materially outperformed its peers due to obvious reasons – high exposure to land vehicles and ammunition, accompanied by German quality. In contrast, Thales, despite being a fundamentally strong company, has lagged its peers like Leonardo, notably, ytd.
Aerospace Stocks’ performance since the war broke out
Aerospace Stocks’ YTD performance
Increased defence orders will take time to be reflected in the P&L...
With more than 50% exposure to defence, Thales is poised to benefit from the shift in the global landscape for defence spending. More than two-thirds of its exposure is to mature markets. The key markets are France (27% exposure at group level), the UK (6%) and Australia (5%), all of which have recently made big budget commitments. France has announced its Military Procurement Law (LPM) which outlines a defence budget of €400bn over the 2024-30 period (+40% vs LPM 2019-25). In the UK, the defence budget this year will amount to more than £48bn - just above the 2% level sought by NATO, with a target of 2.25% by 2025. Other European countries (23% exposure) are also aiming to reach the 2% of GDP guidance.
These commitments will further boost the Thales orderbook, which has already reached a record high level of €31bn, representing 3.4 years of work. These orders will nevertheless be reflected only in the mid-term due to Thales’ exposure to projects with longer lead times. We expect high single-digit organic growth only from 2024 onwards.
Source: Company
...but let’s not overlook its strong balance sheet
Cash conversion is a major concern at times like these, when production levels have to (try to) keep up with the demand and contain substantial execution risks. On this last front, Thales has transformed itself substantially as it is now able to post steady, modestly-upward-looking underlying margins.
A way better managed firm
Balance sheet wise Thales is also one of the strongest players, with a net cash position of €1.1bn expected in 2023 following the sale of its Transport business for €1.6bn. Importantly the figures below allow for clients’ advance payments.
We arrive at this high net cash position even after modelling in a share buyback program of a maximum of 7.5m shares until April 2024 (estimated at €1.8bn in our model), a ramp-up in capital expenditure in the near-term (2023e:+24% vs 2022 and 2024e:+33% vs 2022), as well as elevated recruitment efforts (~12k employees to be recruited this year). This balance sheet strength provides more room for shareholder remuneration, which is already one of the best in class, in the form of an additional share buyback program or higher dividend payments.
Aerospace Stocks’ performance since the war broke out
Aerospace Stocks’ YTD performance
Increased defence orders will take time to be reflected in the P&L...
With more than 50% exposure to defence, Thales is poised to benefit from the shift in the global landscape for defence spending. More than two-thirds of its exposure is to mature markets. The key markets are France (27% exposure at group level), the UK (6%) and Australia (5%), all of which have recently made big budget commitments. France has announced its Military Procurement Law (LPM) which outlines a defence budget of €400bn over the 2024-30 period (+40% vs LPM 2019-25). In the UK, the defence budget this year will amount to more than £48bn - just above the 2% level sought by NATO, with a target of 2.25% by 2025. Other European countries (23% exposure) are also aiming to reach the 2% of GDP guidance.
These commitments will further boost the Thales orderbook, which has already reached a record high level of €31bn, representing 3.4 years of work. These orders will nevertheless be reflected only in the mid-term due to Thales’ exposure to projects with longer lead times. We expect high single-digit organic growth only from 2024 onwards.
Source: Company
...but let’s not overlook its strong balance sheet
Cash conversion is a major concern at times like these, when production levels have to (try to) keep up with the demand and contain substantial execution risks. On this last front, Thales has transformed itself substantially as it is now able to post steady, modestly-upward-looking underlying margins.
A way better managed firm
Balance sheet wise Thales is also one of the strongest players, with a net cash position of €1.1bn expected in 2023 following the sale of its Transport business for €1.6bn. Importantly the figures below allow for clients’ advance payments.
We arrive at this high net cash position even after modelling in a share buyback program of a maximum of 7.5m shares until April 2024 (estimated at €1.8bn in our model), a ramp-up in capital expenditure in the near-term (2023e:+24% vs 2022 and 2024e:+33% vs 2022), as well as elevated recruitment efforts (~12k employees to be recruited this year). This balance sheet strength provides more room for shareholder remuneration, which is already one of the best in class, in the form of an additional share buyback program or higher dividend payments.
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