Thales Q3 Results: Balancing Business Model With Revenues

Thales’ (HO.PA) Q3 results demonstrated the benefits of the balanced business model with commercial revenues and orders partially offsetting the decline in defence markets. In addition, with international markets representing 75% of the group’s revenues at a time when markets in France remain uncertain, Thales’s long-running multidomestic strategy is coming to the fore at a time others are scrambling to develop such a position. With the Probasis operational improvement plan on track to deliver a net P&L benefit of €250m between 2012 and 2014, Thales is benefitting from the restructuring of its operations and market approach.

Nine month results – commercial saves the day
Thales’s commercial businesses achieved growth in Q3, which largely offset the decline in defence. Revenues for the nine months were up 8% to €8,662m (up 1% excluding DCNS), but -2% on an organic basis, with Aerospace & Transport (A&T) up 2% (flat organic) and Defence & Security (D&S) flat (-4% organic). The difference was even more pronounced for order intake, with A&T up 17% (+14% organic) while D&S was down 10% (-13% organic), although that was against a strong comparator due to the large Indian Mirage upgrade order received in Q311.

Strategy to deliver robust performance – 2012 reconfirmed
Thales’s strategy is designed to deliver robust performance in a challenging environment. The balance achieved between commercial and defence revenues is clearly benefitting the group while international markets provide sustained opportunities at a time when French and US markets remain uncertain. As shown by orders received throughout 2012, the most recent large wins >€100m were received from regions such as Asia, Australia and the Middle East. This shows the benefit of the long-term multi-domestic approach that has been Thales’s hallmark.

Valuation: Rating reflects French and US defence concerns
We feel the current rating of 8.4x CY13 EPS reflects the concerns over uncertainty in French (White Book due Q113) and US (sequestration) defence budgets. However, Thales has demonstrated improving performance despite the tough economic environment through its balanced business and Probasis plan.

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