February 28, 2017 / 1:35 PM / 5 months ago

Pilot error poses biggest risk to Thales ascent

3 Min Read

The logo of French defence and electronics group Thales is seen at the company's headquarters in Neuilly, near Paris, May 20, 2008.Charles Platiau/File Photo GLOBAL BUSINESS WEEK AHEAD PACKAGE SEARCH BUSINESS WEEK AHEAD 17 OCT FOR ALL IMAGES - RTX2P3C4

LONDON (Reuters Breakingviews) - Thales looks like the European strongman of the defence sector – with some of the pitfalls that entails. The French group’s stellar financial performance is fuelling a growing war-chest for mergers and acquisitions. Patrice Caine may be tempted to embark on a big-ticket deal, though giving money back to shareholders would be more diplomatic.

In the two years since Caine took his seat in the cockpit, Thales has turned into one of the best performing stocks on the French stock market, with a market capitalisation of 19 billion euros. The average annual total shareholder return is 42 percent since December 2014, compared to 17 percent at British rival BAE Systems. Thales’ operating margin has expanded by one-fifth, and its operating cashflow, after capital expenditure, has doubled.

Rising defence spending is an added gift. American President Donald Trump, due to give his first address to Congress on Tuesday, has previously proposed a 10 percent increase of his country’s defence budget, to more than $600 billion. Moreover, Trump is pressing European members of the North Atlantic Treaty Organization to spend at least 2 percent of GDP on defence, which would increase overall spending by one-third this year, assuming constant GDP. This could create an extra boost for Thales, which generates 50 percent of its defence and security sales in Europe.

Thales is already is sitting on 2.4 billion euros of net cash, 20 percent more than a year ago. And despite its fifth dividend hike in as many years, the group is still paying out less than 40 percent of earnings to shareholders. In a sign of why this might be, Caine says he is looking to strengthen Thales’ digital expertise in areas like big data, artificial intelligence and cyber security.

There aren’t many obvious targets, though. British rival Cobham, after a 58 percent fall in its share price and more than five profit warnings over the last two years, may look compellingly cheap at 2 billion pounds, excluding net debt or any acquisition premium. But the defence sector is racy enough. Caine could win plaudits in a less risky manner, by firing off some more generous payouts to his shareholders.

On Twitter twitter.com/OlafStorbeck

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