Investment Summary: Finding The Balance
Following our attendance at the analyst dinner with new CFO Pascal Bouchiat, it is clear Thales is engaged in a fine balancing act between ensuring growth ambitions are met while enforcing a cultural change to ensure such growth does not come with excessive risk. We were impressed by the frank nature with which both the CEO and recently appointed CFO admitted this has not always been the case in the past. There was also recognition that the new matrix structure of the group has pros and cons and the cultural change required will take time to bed down, allowing only a small, progressive margin improvement.
Ensuring Operational Improvements
One of the first impressions that Pascal Bouchiat had was the level of first-hand interaction of senior management in the largest bids, proposals and operational change programmes. We see this as an indication of the seriousness with which Thales is taking not just the Probasis plan, but also the need for cultural change. As over 50% of revenues are derived from orders under €10m, this is essential. With a new gate review process in place, including independent verification from those outside individual business units, risks are better understood and appropriate terms and conditions are included to manage such risk.
Balancing Short- And Long-Term Aims Through A Matrix
The key for Thales is to balance the need for growth with an appropriate level of risk management. This is being achieved through a matrix management structure in which divisions are responsible for long-term product strategy and geographical heads are responsible for short-term results and account management. Balance is achieved through these roles reporting directly to the CEO, ensuring short- and long-term targets are aligned and appropriate investments are made across the board.
Valuation: Rebuilding Faith, External Factors Weigh
While the environment remains uncertain as the change in French president and looming US election weigh, management is steadily rebuilding faith in Thales, while the Probasis restructuring plan is delivering margin improvement and creating a more competitive platform. The rating of 7.9x CY12 EPS reflects this transition.
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Following our attendance at the analyst dinner with new CFO Pascal Bouchiat, it is clear Thales is engaged in a fine balancing act between ensuring growth ambitions are met while enforcing a cultural change to ensure such growth does not come with excessive risk. We were impressed by the frank nature with which both the CEO and recently appointed CFO admitted this has not always been the case in the past. There was also recognition that the new matrix structure of the group has pros and cons and the cultural change required will take time to bed down, allowing only a small, progressive margin improvement.
Ensuring Operational Improvements
One of the first impressions that Pascal Bouchiat had was the level of first-hand interaction of senior management in the largest bids, proposals and operational change programmes. We see this as an indication of the seriousness with which Thales is taking not just the Probasis plan, but also the need for cultural change. As over 50% of revenues are derived from orders under €10m, this is essential. With a new gate review process in place, including independent verification from those outside individual business units, risks are better understood and appropriate terms and conditions are included to manage such risk.
Balancing Short- And Long-Term Aims Through A Matrix
The key for Thales is to balance the need for growth with an appropriate level of risk management. This is being achieved through a matrix management structure in which divisions are responsible for long-term product strategy and geographical heads are responsible for short-term results and account management. Balance is achieved through these roles reporting directly to the CEO, ensuring short- and long-term targets are aligned and appropriate investments are made across the board.
Valuation: Rebuilding Faith, External Factors Weigh
While the environment remains uncertain as the change in French president and looming US election weigh, management is steadily rebuilding faith in Thales, while the Probasis restructuring plan is delivering margin improvement and creating a more competitive platform. The rating of 7.9x CY12 EPS reflects this transition.
To Read the Entire Report Please Click on the pdf File Below.