Thales/cyber security: asymmetric war flair
Promised growth as a result of Gemalto deal could be tricky to realise
Archimedes was a most famous Greek philosopher who applied science to warfare. French defence, transport and aerospace group Thales is named after an earlier sage better known as a peacemaker. But swords now excite investors more than plough shares, judging from Wednesday’s results. Orders at the group’s defence and security division rose 14 per cent in the first half, pushing the stock up by more than 6 per cent.
A chart of Thales’s equity price reflects geopolitics over the past 30 years. Between the end of the cold war and 2012, the shares were broadly flat. Growing commercial aviation helped shares rise threefold from 2013. As global tensions return to the boil, demand for weapons is rising. The acquisition of cyber security group Gemalto earlier this year reflects warfare’s mission creep from the battlefield into the digital realm.
Thales paid €4.8bn for Gemalto, which makes up the bulk of a new digital identity and security division. The Dutch company brings expertise in fields such as biometric security and unmanned air traffic management. Thales believes cost savings will boost the division’s operating margin of 10 per cent as early as next year. But promised growth could be tricky to realise. The division’s orders still only matched sales of €830m.
Thales is hardly unique as a defence group muscling in on digital security. BAE’s cyber and intelligence division covers many of the areas in which Thales hopes to compete. Yet sales and profitability at the BAE division have struggled. Cyber spookery is a radically different business to fixing warplanes and warships.
Management challenges aside, private sector businesses have been slow to spend heavily on extra cyber security. It should help that penalties for data breaches are rising; in July, for example, the UK authorities threatened to fine British Airways £183m.
Thales shares are now trading back in line with European defence peers at around 18 times forward earnings. If spending on conventional weapons falters, then Thales will need to work a lot harder to justify the philosophy that inspired it to buy Gemalto.