THLLY - Thales: We Like Imperva And Backlog But Valuation Is Steep

2023-11-16 13:48:58 ET

Summary

• Thales has benefited from recoveries in commercial aviation and has a decent backlog development, despite some tough base effects.
• The Imperva acquisition is decent based on the potential synergies, the valuation being what one would expect of mostly civil cybersecurity peers.
• Despite organic growth and ongoing recovery which should buck market trends, the company's multiple is a little high compared to other more under-the-radar deals.

Thales ( THLEF ) has been benefiting from idiosyncratic recoveries in commercial aviation. Backlog developments are decent all things considered, and we think that their uptick can last even through this downcycle in the economy. Finally, we like the Imperva acquisition just based on the PV of synergies. However, we think the valuation is a little steep considering economics and alternatives.

Notes On Earnings and Backlog

The last earnings were at the H1 mark , and it showed strong performance in the commercial aviation facing businesses that had been suffering massively over COVID-19 due to dramatic decreases in equipment investment, newbuilds, and general conservatism around recovery in the aviation business. Digital identity and security are also doing well, tackling next-gen problems like identity theft. We are also seeing backlog pickup in that business.

On order intake , while it is falling across the board, especially in defense, part of the reason is base effects as there was a lot of upfronted ordering directly following the outbreak of the Ukraine war, and also preceding it, as the Rafale had already started to sell astonishingly well among the Gulf Coast Countries, and Dassault is a major Thales customer. Already in Q3, there is a deceleration in order intake declines and it is setting up for a more solid sales environment over a secular horizon. Book to bill remains above 1x.

There is expected to be a margin lift by the end of the year too, according to the latest 9m guidance, so earnings growth should continue, bolstered by a strong civil aviation recovery.

Bottom Line

In addition to organic earnings growth, there is the acquisition to mention of Imperva which we quite like. The multiple post synergies are around 17x EV/EBIT which is actually not too high. Of course, it does rely on substantial synergies above $100 million, including some revenue synergies, which ordinarily cannot be relied upon. But the acquisition will bolster the business with an additional $500 million in revenue, probably at very solid EBIT margins as is common in civil and government cybersecurity software and solutions companies.

While organic growth is high in these businesses, and there is a recovery ongoing in the rest of the businesses, with solid demand underlying defense, we don't love the multiple at above 20x PE. Thales is a premier French company, it's too well known, and there are just too many deals on the market with better yields than this at sometimes even lower risks with better economics.

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