Thales targets capacity boost to meet growing military demand

Thales, Europe’s largest defence electronics group, has said it is shoring up its supply chain in anticipation of rising demand as European countries move to boost their military budgets in the wake of Russia’s assault on Ukraine.

“Over the coming years, the geopolitical situation requires significant growth in the military budgets of the group’s major customers,” said chief executive Patrice Caine. “Our first priority is to ramp up capacity by increasing staff, enlarging our own production and making sure our supply chain can follow.”

The comments came after Paris-based Thales, which also manufactures systems for aerospace customers, published 2022 results on Wednesday in which core profit rose 15.6 per cent to €1.9bn, in line with expectations. Sales rose by an underlying 5.5 per cent to €17.6bn.

Thales is one of several European defence groups that are benefiting from a planned ramp-up in military spending because of the war in Ukraine.

France in particular is planning a 40 per cent step-up in its 2024-2030 military budget to reach more than €400bn, which according to Citigroup should benefit Thales since it earns 28 per cent of sales in France.

To be able to respond to demand, Thales will expand its workforce by about 5 per cent this year by recruiting 12,000 new workers, having already hired 11,500 people last year, a much faster pace of hiring than usual.

Thales predicted that revenue would grow on a like-for-like basis by “mid-single digits” in its defence segment this year, and said it would seek to maintain operating margins of roughly 13 per cent. Last year, when the group made €9.2bn in revenue, organic growth stood at 3.8 per cent.

The company said aerospace revenues would grow by “high single digits” this year on a like-for-like basis, while operating margins would reach 8.5 to 9 per cent next year, close to 2019 levels before the pandemic hit air travel.

Investors reacted unfavourably to the results, sending shares in Thales down 4.5 per cent in mid-morning trading in Paris, making it the biggest loser on the blue-chip CAC 40 index.

Analysts said the 2023 guidance for free cash flow and sales growth was underwhelming. Milene Kerner, of Barclays, said Thales stock had enjoyed “a good run” recently, rising about 12 per cent in the past month compared with a rise of 3 per cent for the CAC 40, so an adjustment was to be expected.

“The fundamental investment outlook has not changed much,” she said. “Thales is well positioned [for] growing defence spending.”