EUR 850.00 For Business Accounts Only

Morningstar | Thales' Full-Year Results in Line; Shares Fairly Valued

Thales reported full-year results in line with expectations after adjusting for the IFRS 15 restatement. Revenue grew 5% organically with a 170-basis-point margin expansion, leading to a 25% pickup in EBIT. Margin expansion came from improved cost of goods sold, which included some one-off reversals as well as enduring savings. Divisional margin improvement came mainly from defence and security with improved project pricing. Emerging markets still led developed markets in sales growth but by a lower spread than 2017, growing organically at 4.7% and 6.5%, respectively, in 2018. While operating cash flow declined 41%, this was due to a partial reversal in working capital in the prior year rather than execution issues. We are maintaining our narrow moat rating and EUR 107 fair value estimate. The shares look fairly valued.

On a segment basis, orders in defence and security and transport outgrew those in aerospace. In the fourth quarter, a number of long-term large orders were booked in both divisions. For transport, these included metro lines in Paris for train traffic supervision, energy systems, and auxiliary equipment, that is, operating control centers. The defence and security segment received multiple orders from the French army for telecommunications systems as well as electronics such as sensors and communications systems for the new Rafale F4 standard. We view management's 2019 guidance of 3%-4% organic group revenue growth as achievable, given overall 2018 order growth and the decent flow of orders in the fourth quarter.