EUR 850.00 For Business Accounts Only

Morningstar | Thales Report June 2019

Owing to leading positions in flight avionics and in-flight entertainment, Thales will benefit from the strong upcycle of aircraft delivery, particularly through increasing deliveries to Airbus. There is a complicated process for aerospace component suppliers to qualify, meant to ensure safety and reliability for the useful life of an aircraft. This limits competition, as few companies have the manufacturing capacity and relationships necessary to become one of two or three suppliers with the right to design systems customised to meet the specific needs of the next-generation aircraft body. As well as flight avionics and in-flight entertainment and connectivity, or IFEC, Thales is the number-one supplier of defence electronics in Europe and will benefit from an improved outlook in the mature defence marketThales saw good order intake in recent years, with large multiyear contracts, including six contracts worth over EUR 500 million (London Underground signalling, Rafale in Egypt and Qatar, Australian 4x4 Hawkei and OneSky programme, and the French military ComSat satellite). Following this, top-line growth will increase in 2019 and 2020. Additionally, the firm will see profitability improvements stemming from operational leverage, rationalisation of its industrial footprint and support functions, and reinforced governance over bid control and project execution by the transport division’s management team.Although we like the moaty aspects of the aerospace and defence business, the risk of underdiversification of platforms supports our narrow moat rating, as this shakes our confidence in excess returns for the wide-moat period. Thales’ profitability is strongly linked to sales of Airbus aircraft, as the firm has limited exposure to Boeing aircraft platforms. Additionally, the firm has limited exposure to the large U.S. defence market, but competes heavily with large U.S. defence companies in the global fighter aircraft market via an exclusive 25% position in the European platform Rafale. The risk of underdiversification was apparent in 2009-11, when cost overruns for the Airbus A400M platform led to losses and returns on invested capital below the cost of capital.