Thales Earnings: HI 2023 Results in Line With Consensus, Revenue Guidance Raised; FVE Maintained

Narrow-moat Thales HO reported strong first-half 2023 results, aligning with company-compiled consensus. Our fair value estimate is unchanged.

Sales increased by 5.6% (7.7% organically), with civil aerospace driving growth in both OEM and aftermarket. Space was affected by supply chain tensions that are expected to ease in the second half. The defense & security business showed resilience with mid-single-digit growth. Digital identity & security, or DIS, sales surged 36% organically, mainly due to an outstanding first-quarter performance (up 20%).

Management raised full-year sales organic growth guidance to 5%-7% (EUR 17.9 billion to EUR 18.2 billion after accounting for currency impact) on anticipated civil aerospace continued recovery in the second half. EBIT reached EUR 993 million, up 13% organically from first-half 2022 with a record-high margin of 11.4%. DIS margin expansion (12.3% to 15.9%) was aided by scope effect and sales margin improvements. Aerospace also showed strong margin improvement of 2.8% organically versus first-half 2022, nearing pre-COVID-19 levels.

Thales maintained its full-year EBIT margin targets at 11.5% and 11.8%, cautioning about the sustainability of the exceptionally high DIS margin due to a unique product mix and a significant gap between prices and material costs that is expected to narrow in the second half.

Negative working capital in the first half was mainly due to seasonality and strategic stock build-up to address supply chain challenges. Confirmed full-year free cash flow was EUR 1.5 billion.

Order intake remained strong at EUR 8.6 billion but was down 23% versus first-half 2022 due to the previous year’s large jumbo contract for Rafale aircraft to the United Arab Emirates. The book-to-bill ratio stood at 0.98, in line with management’s guidance of 1.00.