Thales’s growth hit by supply issues as order book hits record high

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French aviation and defence electronics group Thales expects supply chain problems to hold back growth again this year, despite it having a record high order book as countries boost military spending to face rising geopolitical tensions. 

“Last year was a bumpy journey in terms of managing the supply chain, particularly in our defence business, and it is hard to predict if we will see significant progress on the matter,” said chief financial officer Pascal Bouchiat on a call to investors.

The Paris-based maker of radar systems for civil and military aircraft, satellites and drones, cited printed circuit boards and hardware as two areas where its own suppliers were struggling to produce enough. 

The group forecast “mid-single digit” growth for its defence and security business this year — its largest and most profitable unit — although Bouchiat said given its record high order book at €45bn it could have delivered at a quicker pace if supply chain problems were not an issue. 

Thales benefited last year from both the recovery in commercial aviation after the trough of travel during the Covid-19 pandemic and a ramp up in military spending in the US and Europe sparked by the war in Ukraine. It has also been expanding via acquisitions in the cyber security market, and remains interested in deals.

It reported that operating profits were 11 per cent higher at €2.1bn last year, while sales rose by 8 per cent to €18.4bn, slightly ahead of expectations in a company-compiled consensus. Next year, Thales predicted comparable sales growth of 4 to 6 per cent. 

The company’s order intake stood at €23.1bn in 2023, roughly stable from the previous year. It will raise its dividend to €3.40 per share, up from €2.94 in 2022, but Bouchiat said it did not plan to immediately extend a share buyback programme that will expire this month given other demands on its cash such as pensions charges.

Thales’s shares were up 8 per cent in midday trading on Tuesday, reaching record highs.

“Strong orders bode well for growth and cash beat is always appreciated,” Citi analysts wrote in a note.

To keep up with demand, Thales has been on a hiring spree to add about 11,500 people in 2022 and 10,900 in 2023, but will temper the pace this year to around 8,500. The hiring slowdown can be attributed to lower attrition with more employees choosing to stay. 

Some 1,300 job cuts are planned at the Thales Alenia Space unit because of a reduction in demand for telecommunications satellites, although some employees will be offered other posts in the group. The market for large satellites in geostationary orbit has dropped to about half to 10 a year, the company said, because of technology changes to smaller satellites. 

Airbus, the other European maker of large satellites, has also reported pressure on this part of its business and took €600mn in impairment charges on it in mid-February.

Thales supplies electronics for Dassault Aviation’s Rafale jet, as well as communications equipment for armies, radars for surface-to-air missiles, and shoulder-fired missiles known as NLAWs that have gained in popularity on the battlefield in Ukraine.

Thales’s shares are up about 80 per cent since February 2022, compared with a 32 per cent rise for the MSCI global aerospace defence index and a 13 per cent rise for the French blue-chip CAC 40 index.