At an undeserved 20% discount to EU Defence peers on an EV/EBIT basis (BBG cons. estimates), we see an attractive entry point with limited downside risk. The 36% increase in order backlog in Q1’15 is thanks to its 25% work content on Dassault’s Rafale fighter jet which has enjoyed firm orders from Egypt and Qatar in Q1. Some investors were disappointed after Thales explained these orders would enable a sustained build rate rather than incremental upside, but we see this as a veryconservative planning assumption given the probable order from India for another 36 jets, which would drive incremental growth via doubling the build rate from 11 to c.22 aircraft per year from 2016/17 (c€520m revenue and c6% EBIT). With balance sheet optionality (€1bn, or 0.8x Net Cash/EBITDA) and a materially improved backdrop to French defence, we see limited downside with significant upside. A buy back to lever to 1x Net Debt/EBITDA would offer c40% accretion to FY16 EPS, for example.
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