Thales (PA:TCFP) was the ugly duckling of the aerospace and defence sector for many years. However, it delivered organic growth in 2015 for the first time in six years, is closing in on its 9.5-10% EBIT margin target and has won a number of high-value contracts. Its transformation into a swan has seen the stock trading up 32% ytd (vs the SXP -4.5%), on a premium rating of 19.1x FY17e compared to the sector average of 16.5x. Thales’s adaptation into a streamlined, competitive technology company with growing emerging market exposure is well rated, but further catalysts are required.
Tangible progress in emerging markets
Over the past three years Thales has demonstrably grown its emerging market exposure, despite market scepticism about whether this was achievable for the company. Sales to emerging markets (€4bn in FY15) are up 49% since 2012 and have increased as a percentage of sales from 22% to 28%. Emerging market orders have doubled and represented 33% of the FY15 order intake compared to 24% in FY12.
Thales has succeeded where some of its peers have failed and credit for this is given in the current share price. Since the Q3 results, Thales has been chosen to supply avionic parts for over 400 new Airbus and Boeing (NYSE:BA) aircraft being supplied to China. This is significant because Chinese airlines are responsible for the majority of the projected civil aerospace fleet growth, so this is a growth market for Thales going forward.
A more streamlined portfolio
On 18 November Thales announced that it is in negotiations with private equity firm Latour Capital to divest its business which provides ticketing and revenue collection for transport operators, as well as tolling and car park management systems.
The business only represents 10% of Transport division sales, but this is further evidence that management is committed to streamlining the transport portfolio to focus on its core profitable technologies: rail signalling, and communication and supervision systems.
Transport (11% of FY15 group sales) has been a drag on profitability recently, but management maintains that its operational recovery is on track. At 30 June, Thales had net cash of €1.4m so is in a strong position for M&A.
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