Morningstar | We Raise Thales’ FVE Due to Robust Defence and Transport Sales Growth in First-Half 2018
We raise our fair value estimate for narrow-moat Thales to EUR 107 from EUR 100 as we adjust for the time value of money, and we increase our 2018 and 2019 EBIT margin and revenue assumptions on higher-than-expected sales growth and strong order growth in the first six months of 2018 for the transport and defence & security segments. Thales reported first-half sales of EUR 7.45 billion, up 5% on a reported basis and 8% organically year on year. Sales growth in defence, up 8.5% on an organic basis, was especially robust in mature markets (up 10.2%), reflecting increasing defense budgets. Although reported sales and order numbers exceeded our expectations and showed the business' underlying strength, we expect the second-half growth rate to be significantly lower than the first half, owing to a high basis for comparison (organic sales growth between fourth-quarter 2016 and fourth-quarter 2017 was 15%). We believe the shares are currently fairly valued.Thales recorded a robust level of orders in the first half, amounting to EUR 6.3 billion, up 5% on a reported basis and 8% on an organic basis from a year earlier. These included three large orders in second-quarter 2018, among which was a satellite order for Eutelsat, a combat management systems for the German Navy, and a sonar systems contract for the Royal Australian Navy. The group's order book of EUR 31 billion at end June represents nearly two years of sales.
In addition to the solid order intake, we were pleased with the transportation segment results, which confirmed our thesis of margin expansion due to strong sales growth and improved discipline in refraining from loss-making project bids. Transport revenue increase 18.8% in the first half due to solid execution of large urban rail signaling contract wins of 2015 and 2016, while gradual phasing-out of low-margin contracts signed under previous management and operational leverage resulted in 180 basis points of margin expansion relative to last year.
Thales is an electronics and systems group, serving defense, aeronautics, transport, space and security markets. Co.'s operations can be divided into four operating segments: Aerospace (Avionics, Space), Transportation (Ground Transport Systems), Defence & Security (Secure Communications & Information Systems Land and Air Systems, Defence Mission Systems), and DCNS. Co. designs and delivers systems for all four environments: air, land, sea and space. These systems detect and assess threats, manage information, support command decisions and control engagements through to threat neutralization. Co. is active in ground transportation; air transport; navigation systems.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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