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15 Mar 04. The FT reported that Thales, the French defence and civil electronics group, defied the difficult environment in civil aerospace last year and said it expected double-digit growth in 2005 and 2006.

Denis Ranque, chief executive, said that its operating performance was likely to improve in 2004 as its information technology and services division increases sales and its military order book strengthens.

Thales has spent over €3bn ($3.7bn) since 2000 refocusing itself on its core businesses of defence, aeronautics and IT and services and Mr Ranque yesterday added to speculation that there could be further purchases.

“We are looking at ways of solidifying our alliance” with DCN, the French state-owned shipyard, he said. But he said Thales had no plans to bid again for Snecma, the state-owned aircraft engine maker, which rebuffed a merger approach earlier this year. The French government plans to float part of its stake in Snecma later this year.

Thales is forecasting growth in operating profits of more than 10 per cent a year in both 2005 and 2006 on revenue increases of at least 5 per cent. For this year, it sees more modest earnings growth of 2-5 per cent after its IT business, where profits fell 31 per cent to €37m, recovers from €1.5bn of disposals. Full-year net profit rose from €111m to €112m, ahead of analysts’ forecasts, and both debt and cash flow figures beat expectations.

Analysts said that the level of net debt, which fell to €906m last year meaning it has more than halved in the past three years, left the company able to make acquisitions when it felt fit. With regard to an acquisition of Howaldtswerke Deutsche Werft, the German submarine maker, Mr Ranque said: “In strategic terms, we cannot fail to be interested by what happens in the sector. [But] that does not mean we seek to make acquisitions for the sake of it.”

Thales’s defence order book swelled by nearly €1bn to €6.95bn and operating profit in the division rose 13 per cent.

“Thales has benefited from having the right technologies in the right places,” said Will Mackie, analyst at Commerzbank, highlighting its work in communication systems and avionics in defence contracts.

Operating profit in the aerospace business rose 11 per cent on flat
revenues as it bucked the downward trend of the sector.

But some analysts questioned whether the group was right to call a recovery in civil aerospace in 2005, saying potential demand looked weak beyond that.

Group operating profit rose to €698m, or an increase of 7 per cent on the previous year stripping out the effects of the Euromissile litigation which reduced earnings. Restructuring costs increased sharply to €197m but Ross McInnes, chief financial officer, said they should fall to about €100m this year boosting operating profit. Revenues fell 5 per cent to €10.57bn weighed down by the strong euro. Thales shares closed down 2.4 per cent at €29.04, having outperformed the sector by about 17 per cent over the past three months.

Comment: Thales is emerging as the lynchpin in the future European defence structure. The company is strongest in the crucial area of C4ISR and has a stake in the US JTRS program through Thales Inc. The company would strengthen the EADS defence communications business and rumours abound to the final structure of the deal. There are other rumours that a pan-European C4I business could be created with EUROSYSTEMS which would bring in BAE’s US expertise.

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