We have been arguing for a while that certain areas of the national budget are hard to negotiate as has been exacerbated by rising geopolitical pressures. With the structural need for further increasing the defence spent, especially in Europe, we consider the equity story intact. Following our model review - including higher volume and op. leverage assumptions for 5% higher adj. EBITA 26/27e - we raise our TP to EUR 640 implying 11x EV/EBITA 26e. With the CMD on 18/19 November likely to further bolster the mid- to long-term opportunity we reiterate Outperform.
Key takes from the call - positive colour on orders, mid-term margins and FCF dynamics
1) Political debate: closing of the Loc deal is still expected by YE24, feedback from leading bodies in the U.S. is positive; for Germany, the CEO considers the impact from the collapse of the traffic light coalition minor; 2) Demand: new RHM Nomination target - EUR 30-40bn (vs. EUR 40bn) - reflecting potential slippage into 25, which is also well filled, e.g. via the JV with Leonardo in Italy; 3) Profitability: the CEO reaffirmed his ambition of generating a mid-term margin of 20% in Defence (VA 27e: 19.0%) upon op. leverage tailwinds at VS/ES; 4) FCF: 50% conversion target unlikely to be the last word.
Model update - we lift adj. EBITA and OpFCF 26/27e by MSD-HSD, led by VS and WA
After the release of Q3 results (cf. our first take here) and the related comments by management on the call, we have fine-tuned our model assumptions prompting a c. 5% uplift of our adj. EBITA 26/27e with OpFCF up 8% in those years. Neither have we included the Loc deal in our numbers, nor ample optionality going forward arising from strong FCF generation that should quickly approach EUR 1bn p.a. upon the phase-out of major capex projects and swift op. profit growth. In this regard, we note that RHM reiterated the earlier c. EUR 20bn sales goal in its exco changes press release yesterday.
TP raised to EUR 640 (from EUR 585)...
