(News Bulletin 247) – The technology and defense group has published significantly improved results on all of its financial indicators in the first half and has raised its growth outlook for the current financial year. But the turnover target has been revised downwards in value due to exchange rate effects and the market is taking its profits on the stock.

It is the harsh law of the market. In the middle of the earnings season, a publication in line with expectations or even a little above can be penalized on the stock market if it does not contain any notable surprises. Thales makes the difficult experience this Friday. The technology and defense group has yet delivered a very acceptable copy over the first six months of the year.

Order intake fell by 23% like-for-like, to 8.56 billion euros, but this drop is not worrying and is explained by the excellent first half of 2022, during which the group had notably recorded orders related to the Rafale contract for 80 aircraft for the United Arab Emirates. Remember that if Dassault Aviation designs the fighter plane, electronic equipment from Thales represents 20% to 25% of the value of the aircraft.

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Resumption of civil aeronautics

Growth is also on the agenda with like-for-like revenue growth of 7.7% over the half-year, including 6.3% in the second quarter. The turnover for the first half thus amounted to 8.716 billion euros while analysts expected an average of 8.64 billion euros, according to a consensus posted online by the company.

“The increase in turnover benefited in particular from a solid performance in avionics (electronic equipment on board the aircraft, such as systems for viewing films and series) driven by the continued recovery of civil aeronautics activities, strongly affected by the health crisis, and sustained momentum in the digital identity & security operational sector”, underlined the company.

Operating profit was up 13.1% like-for-like, at 993 million euros, again higher than the figure expected by analysts (980 million) while the corresponding margin was 11.4%, up 60 basis points over one year, or 0.6 points. Net income increased by 15% to 649 million euros and adjusted net income, favored by the group, increased by 13% to 819 million euros, or 7% more than the consensus 764 million euros.

Growth target raised but…

As for the generation of operational cash, it remains in the green at 99 million euros against 820 million euros in the first half of 2022. “In the first half of 2023, the group recorded an increase in its working capital requirement due to the increase in inventories. This is explained by the significant increase in activity, the effect of inflation and finally the build-up of inventories for products for which the group is seeking to increase its resilience”, explains Thales. Analysts had well anticipated these elements since they were counting on average on a fairly close operating free cash flow of 85 million euros.

In the light of this good landing in the first half, Thales has tightened its annual growth forecast range on a like-for-like basis, expecting an increase of between 5% and 7% against 4% to 7% previously. The operating margin is still expected to be between 11.5% and 11.8%, after 11% in 2022.

The grain of sand in the well-oiled mechanics to be sought on the side of the forecast of turnover in value and more exactly in euros. Thales retains a target of 17.9 billion euros to 18.2 billion euros, against 18 to 18.5 billion euros previously. The fault is not with the company’s operations but with unfavorable exchange rate developments.

This mechanically induces a lower operating profit forecast in value since the margin projection is unchanged (between 2.06 billion and 2.15 billion euros against 2.07 billion to 2.18 billion euros previously).

This impact on foreign exchange “is stronger than initially anticipated” and leads consensus expectations for 2023 to be at the top of the group’s forecast range for both revenue (18.3 billion euros) and operating profit (2.14 billion), notes Jefferies. The bank expected, in a note published before the opening of the Stock Exchange, a “slightly negative” reaction from the market.

Profit taking

However, investors strongly sanction the publication, even though Thales beat expectations on all possible indicators. The title thus lost 3.9% to 134.75 euros around 3:10 p.m.

“The results are rather positive overall, the market may be taking profits due to the absence of a big positive surprise,” said a Parisian analyst.

“The action had progressed before the publication (Thales had in particular taken 3% then 1% following the announcement of the acquisition of the company Cobham Aerospace Communications, editor’s note) and it would probably have taken a massive increase in the outlook to prevent the title from falling, so there is profit taking”, corroborates a financial intermediary.

“Remember that in periods of bull markets, rising stocks like Thales fall sharply and rise slowly, while it is the opposite in periods of bear markets”, he adds.