Breakingviews - Defence stocks’ surge is only getting started

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Europe’s defence companies are headed for a prolonged boost. On Sunday, Germany’s Chancellor Olaf Scholz promised to ramp up spending on tanks, drones and soldiers to 100 billion euros this year, and ratchet up its defence budget to beyond the 2% of economic output expected by NATO countries. Shares in Britain’s BAE Systems and Italy’s Leonardo were up 14%, while Germany’s Rheinmetall and Hensoldt rose 33% and 46%, respectively.

They could be in for another bump. Closing NATO’s funding gap would cost around 62 billion pounds per year, Jefferies analysts reckon. Germany’s news added 3 billion pounds to BAE’s 20.5 billion pound enterprise value.

That implies BAE could gain around 3% of this extra revenue, according to a Breakingviews calculation that assumes the group’s current 13% EBITDA margin and a 2023 multiple of 9 times. However, Russia’s recent actions are likely to push other countries, like the United States and Britain, to ramp up their defence spending to far beyond 2%. Hence the potential pot of defence funds could exceed the market’s current expectations.

 

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