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THALES UPBEAT ON RESULTS

13 Mar 03. Thales SA (Paris:TCFP.PA – News)swung back to a net profit in 2002 and vowed on Thursday to boost revenues and core profits this year on the strength of its defence business.

Net profit came in at €111m for the year following a net loss in the previous year of €366m — a figure which included €530m in exceptional writedowns, mainly related to the 2000 acquisition of Racal.

Operating profit, including the impact of a €65m fine stemming from arbitration with Euromissile, fell to €597m (2001: €645m).

Both profit figures were slightly below the expectations of analysts, who had forecast, on average, that the company would post net profit of €120m and operating profit of €609m, including the fine.

“Despite a business environment that is expected to remain difficult in civil aviation and certain IT&S businesses, revenues and operating income are expected to increase in 2003, notably as a result of the performance of the group’s defence business,” the company said in a statement.

The company’s profit driver in 2002 was its defence division, which posted an eight percent rise in operating profit to €482m, once the Euromissile fine was stripped out.

Aeronautics profits edged up three percent to €126m, while the firm’s troubled information technology and services (IT&S) unit saw profits slump 31 percent to €54m. The company did not provide comparisons on a divisional basis including the fine.

“The results are roughly in line with expectations,” said a Paris-based analyst, adding that he would be seeking more details on the outlook.

Thales, which has snared a series of high profile contracts in recent months, said it planned to pay a dividend of €0.70 for 2002, identical to its 2001 payout.

Most analysts are bullish on the company’s fundamentals, largely because of its exposure to rising defence budgets in Britain and France. Unlike competitors in Britain, it is not saddled with major unfunded pension liabilities — Thales said they totalled €360m after-tax at end-2002.

And as a systems maker, rather than prime contractor like BAE Systems (London:BA.L – News) or EADS (Paris:EAD.PA – News), the company offers more attractive growth and margin prospects. But Thales shares, which are hovering at their lowest levels in seven years, have been suffering because of share overhang concerns. Investors fear that both the French government, which owns a 31.8 percent stake in the company, and telecoms equipment firm Alcatel (Paris:CGEP.PA – News), which owns 9.5 percent, could sell their holdings over the coming year, sharply increasing the number of shares in circulation and depressing the stock.

Comment: The wins on Watchkeeper and FIST and CVF has established Thales as the second largest UK defence contractor vindicating the policy established by Brain Asbee and his team in the 1980s. The company is making headway in the US with wins with MBITR radios and helmets, the sudden volte face by the French Governemnt on a definite veto of the UN resolution to one which they would consider the alternatives may have been led by industry lobbying M. Chirac not to confront the US with Airbus, Thales and Peugeot being likely casualties. The French government is said to have an interest in creating a national defence champion which may include DCN, Thales and Dassault, putting EADS on the sidelines. EADS is in a weaker position with its Airbus sales falling and lack of German spend and a full merger with Thales now looks a forlorn hope (see EADS ANNOUNCE PROFITS FALL). The establishment of the Anglo-Italian EUROSYSTEMS is seen as a way of creating a rival to Thales in electronic systems.

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