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What happened? We hosted a two-day field trip to DSEI UK in London, Europe''s largest (bi-annually held) defence trade show featuring meetings with Rheinmetall (+) - confirming our positive view as per our recent sector note - Exosens,(+), Hensoldt (=), and RENK (=) as well as with non-covered, listed companies such as BAE Systems, Elbit Systems, Kongsberg and Saab. Besides, we met with non-listed players such as CSG Group and KNDS. The venue has more than 1,600 exhibiting companies from over 90 countries that are expected to receive up to 45,000 visitors between September 9 and 12. BNPP Exane View: We draw three main conclusions for the defence companies in our coverage universe: 1) pan-European enjoy very high demand due to various geopolitical conflicts around the globe with none of the corporates we met questioning the multi-year growth opportunity; 2) from a regional perspective, demand momentum is unsurprisingly expected to be strongest in Germany, while the outlook for the rest of Europe is highly heterogenous; and 3) from a domain-perspective, land systems and ammunition continue to stand out, which, however, is not least a function of not least Germany''s push in these two areas, in our view, if it wasn''t for specific programs benefiting certain players. Land domain - MSD to LDD volume ramp-up foreseen and addressed diligently: After earlier media reports stated that Germany might consider ordering e.g. 3-5k Boxer vehicles, we see at least directional confirmation by our meetings with an expected quadrupling in output volumes over the next four years before taking a more stable development thereafter. Yet, we understand that this does neither include upside risk related to e.g. the envisaged circular reserve for the German Army, nor does it cater for either additional orders from export markets nor from aftermarket / OandM contracts, and we recall that e.g. RHM''s CEO regarded the mentioned numbers in the press as ''very conservative'' on the...
RHM HAG R3NK
While Q2 was a light print, it is a small quarter and was impacted by temporary headwinds. On the call, mgmt. reassured on FY25 guidance and reiterated conviction in securing c.50% of future procurement spending in Germany at ''good down payments''. With government planning in Germany spanning until 2029 and 2035, we expect growth to continue well beyond 2030, as should be discussed in more detail at the CMD on 14 Nov. As much as we can understand frustration with Q2 results, this should be temporary. Reiterate O/P. Conf call: 2025 under control, 10y visibility in Germany, optionality elsewhere (BBG script) Mgmt. flagged that the German govt.''s defence procurement plans cover the periods 2025-29 and 2029-35, with publicly discussed numbers for armored vehicles in Germany (HAG''s CEO pointed to a 5-digit number) considered ''very conservative'' by RHM''s CEO; thus, we think the EUR80bn pipeline through end-H126 is just the beginning. MandA might contribute c.EUR1bn pa to reiterated 2030 rev. of EUR40-50bn, which we estimate can easily be financed through down payments from Germany, while RHM''s size and relationships make it a go-to partner in our view. The recovery of deferred EUR0.6bn rev. at EUR120-150m op. profit in Q2 is encouraging, with full catch-up expected in H2. Model update: fine-tuning post Q2 release, our 2026-28 adj. EBITA remains 7% above Street Following today''s results, we fine-tune our model assumptions, and while we admit that a 6% cut to adj. EBITA ''25e is not necessarily comforting, we believe potential 20-30% pre-payments in/from Germany will provide more than enough offset given an order pipeline of c. EUR60-70bn over the next 12 months, and we note that these are barely reflected in consensus at this point. Reiterate O/P: RHM is the German go-to defence OEM; initiation of coverage of RHM ADR Our base case TP is EUR2,300, while a blue sky using a 26% contribution margin (vs 21%) would lift our adj. EBITA ''30e by c.20% to EUR9.5bn...
Rheinmetall AG
The call is at 1400 CEST / 1300 BSTRheinmetall Q2 numbers look slightly below consensus, with the likely biggest shortfall being a near-complete lack of order intake, and so apparent lack of momentum. This is, in our view, almost all about timing: with the German Government formed late in the quarter, no orders were able to be placed. But no change to what remains a multi-year investment story: European rearmament looks likely to us to run well into the 2030s, with Germany leading in size of spend and pace. Revenues were broadly in line with our estimates for what had been flagged to be a slow quarter: Vehicle Systems’ deliveries of the next tranche of German trucks only start mid-August, slightly later than in 2024. But Weapons & Ammunition sales were strong, despite the loss of c.€170m of sales due to the Murcia plant accident. Operating earnings were light in all divisions except Weapons & Ammunition – this division is clearly benefitting from good mix, including large calibre tank and artillery ammunition deliveries for export customers. But Electronic Solutions was held back by start-up costs for the F-35 fuselage plant at Weeze. Cashflow was far weaker than we had expected in Q2. In part this reflected a €1.1bn inventory build during the quarter, reflecting deliveries scheduled for Q3 and, even more, Q4. But the lack of German orders in Q2 also meant that there were no prepayments, which in recent years have often offset the normal highly seasonal working capital cycle – these should return in Q4. No change to FY guidance: 35%-40% defence sales growth, c.15.5% operating margins, and c.40% cash conversion rate. The heavy Q2 working capital build suggests to us that H2 backlog cover is very high. The company had referred to a likelihood of raising guidance at the Q1 stage, and continues to hold out the hope that it will be able to raise this guidance. But this is now an end-Q3 possibility at the earliest, in our view, given the increasingly Q4-weighting of deliveries and profitability. This may disappoint some investors who had expected a more immediate response in terms of orders and guidance following the June NATO Summit, and European commitment to increase defence spending to 3.5% of GDP by the mid-2030s. We note that Germany is currently planning to reach that level by 2029e. But we will wait for detailed budgets, likely in September, once the Government is fully up and running.
What happened? Rheinmetall''s Q2 orders/ sales/ adj. EBITA/ FCF/ EPS are -69%/ -6%/ -5%/ -22% vs. BBG Consensus estimates. Guidance for FY25 was ''only'' reiterated, yet both the better than feared Q2 release and wording points to upside risk: . Sales: EUR 12.2-12.6bn (BBG: EUR 12.6bn | LTM Q2: EUR 10.7bn); Defence/Civil: +35-40%/flat confirmed . Adj. EBITA: c. EUR 1.9-2.0bn (BBG: EUR 2.0bn | LTM: EUR 1.57bn); margin target: 15.5% (BBG: 16.0%) . Op. FCF: EUR 0.7-0.8bn as per a 40% EBITA-FCF conversion target (BBG: EUR 0.9bn | LTM: EUR (8)m) BNPP Exane View: Firm orders are light at EUR 1.8bn (-69% vs. BBG), however, in a very small quarter vs. a particularly strong Q4, in our view, with the EUR 63bn order book (flat q/q) covering 5x sales 2025e; former RHM Nomination target of EUR 55bn in ''25 has been replaced by 1Y FW order pipeline target of c. EUR 60-70bn reflecting timing uncertainty on new orders. Execution was light due to several headwinds though with sales of EUR 2.4bn (-6%% vs. BBG) and adj. EBITA at EUR 276m (-5% below) thx to healthy margins ex ES. Given 1.7x as high sales in H2 vs. H1, Q2 FCF of EUR (911)m suffered from NWC build-up / low prepayments. Unch. FY25 guidance signals high confidence in H2 catch-up, yet, the impact from the 3.5% NATO declaration and the budget step-up in Germany should be in focus on today''s call. Defence orders of EUR 1.8bn were -47% y/y vs. (low quality) Cons. at EUR 5.9bn with the order backlog at EUR 63.2bn and RHM Nominations of EUR 2.6bn in Q2. In the slides, RHM puts the German pipeline at EUR 46-58bn with international projects adding another EUR 13-15bn underlining the opportunity once decision-making is picking up, esp. in Germany. Execution: Q2 sales at EUR 2.4bn (-6% vs. BBG) were particularly driven by the earlier mentioned pull-forward effects at Defence, a c. EUR 200m revenue slippage at WA and a later start in truck deliveries (c. EUR 0.3bn) for total DEF ex OH +18% y/y; PS weak as...
What happened? Rheinmetall (RHM) is scheduled to report Q2 2025 earnings on 7 August 2025. Today''s group pre-close call with HIR served to discuss the latest statements made since the Q1 release on 8 May. Net net, HIR conveyed a balanced message with earlier articulated headwinds (Q1 pull-forward, Murcia plant incident, order pipeline skewed to H2) suggesting a soft Q2 for all relevant KPIs, which is, however, offset by the confirmation of all FY25 guidance parameters. We also expect a meaningful upgrade of 2027/30 targets at the CMD (18 Nov.), reflecting faster defence spending in Europe, led by Germany as per the disclosed 2025-29 federal budget plans. The comment below should be read as our interpretation of the discussion rather than specific company commentary. Guidance is unchanged. BNPP Exane View: Demand: With Q1 reporting, RHM had upgraded the target for so-called RHM Nomination to EUR 55bn vs. EUR 30-40bn before. However, order announcements in Q2 have been on the low side reflecting the government transition in Germany and subsequently decision-making taking more time than usual. In short, we think BBG''s actual EUR 4.6n order intake estimate is likely too high; however, HIR also stated that discussions with Germany suggest 1) a high conversion of frame contracts (EUR 23bn at Q1-end) and 2) a likely usage of the embedded 50% step-up option, while highlighting that momentum elsewhere in Europe is equally good, referencing Spain and Italy. As such, decisions for additional order intake are likely to start in September with the largest impact, however, expected in October/November. Execution: We understand that beyond the well flagged reversal of Q1 tailwinds (c. EUR 140m revenue pull-forward at Defence, pos. mix at WA), the incident at the Murcia plant has resulted in a c. EUR 200m revenue slippage, which is expected to be fully recovered in H2. As a result, we model Q2 sales of EUR 2.61bn (+17% y/y | H1: +44% y/y) for adj. EBITA of EUR...
What happened? In its The Hague Summit Declaration NATO allies reaffirmed Article 5 as well as the previously discussed 5% spending target by 2035 (cf. Rutte''s expectation latter dated 23/6), however, adding a subtle ''at least'' to the 3.5% target for hard military spending besides up to 1.5% for infrastructure. While the NATO summit has consumed the lion share of investor interest, the political push in Germany has gone widely unnoticed with total defence spending forecast to rise to EUR 162bn or 3.5% of GDP by 2029 as per the latest federal finance plan vs. EUR 95bn/2.4% in 2025 (cf. our recent note). BNPP Exane View: Key snippets from the Hague Summit Declaration: . Article 5 reaffirmed: ''We reaffirm our ironclad commitment to collective defence as enshrined in Article 5 of the Washington Treaty - that an attack on one is an attack on all'', which also includes the U.S. . 5% spending by 2035 confirmed, but: While no surprise to the earlier articulated 5% headline figure for total defence spending, it is worth highlighting that NATO has agreed upon allocating ''at least 3.5% of GDP annually'', while prior discussions have been looking at a simple 3.5% plus 1.5% split. . Review scheduled for 2029: The statements that ''the trajectory and balance of spending [...] will be reviewed in 2029'' and that ''Allies agree to submit annual plans showing a credible, incremental path to reach this goal'' signals that that the earlier interpretation of a potentially backend-loaded pattern (cf. 5% by 2035) might not apply (at all). . Transatlantic defence industrial cooperation: Irrespective of putting any such transatlantic cooperation in writing, the industrial reality has already materialised as one can take from the cooperation between RHM and Lockheed Martin (NC) for either the F-35 center fuselages as per the MOU in Feb. ''23 or for rockets and missiles in April 2025. Investor focus might or should shift back to country-specific potential: As much as the market...
What happened? While earlier media reports in May had stated that German Defence Minister Boris Pistorius aimed at hiking the country''s ordinary defence budget to over EUR 60bn starting in 2025, total defence spending is expected to rise to EUR 162bn or 3.5% of GDP by 2029 as per the latest federal finance plan, which is to be decided by the cabinet on Tuesday. BNPP Exane View: German defence budget composition: The total German defence budget, which amounted to EUR 79bn in 2024, thus equating to 1.8% of GDP by our calculations, consists of three buckets in total: 1) the ordinary budget, which is part of the country''s budget (2024: EUR 52bn), 2) the special fund (2024: EUR 20bn), and 3) Ukraine aid (2024: EUR 7bn). Total defence budget might rise to EUR 95bn in 2025 for a GDP quota of 2.4%: According to various local media reports referring to information from government circles, total defence spending might rise to EUR 95bn in 2025 for a quota of 2.4% versus earlier reports having looked at EUR 87bn / 2.0%, respectively. In addition to the steady increase in the ordinary budget from EUR 62bn in 2025 to as high as EUR 153bn by 2029, the special fund is expected to contribute about EUR 25bn p.a. in 2025-27, thus exceeding the earlier agreed EUR 100bn by EUR 5bn based on earlier disclosed information for the respective tranches in 2023/24. What is more, the Ukraine aid bucket is seen stable at EUR 8.5bn p.a. for total defence spending of EUR 162bn by 2029 vis-a-vis a GDP quota of 3.5% in that year. Borrowing expected to reach EUR 121bn by 2029: Funding has been secured via exempting security expenditures from the debt brake in the Basic Law as decided in March stipulating that defence and security spending in the amount of 1% of the previous year''s GDP must be financed from the national budget. Conversely, military procurement and spending for civil and population protection or intelligence services that exceed the 1% threshold can be financed via...
What happened? The U.S. have attacked three major Iranian nuclear sites on Saturday night via its ''Operation Midnight Hammer'', putting the US directly into Tehran''s war with Israel, which compares to President Donald Trump''s earlier promises to avoid new conflicts. Besides, NATO agrees Hague summit statement with 5% defence spending goal, diplomats say. BNPP Exane View: What needs to be known about the attack? The attack is said to have involved 125 aircraft including B-2 stealth bombers, the latter can be equipped to carry America''s weapons with a weight of ~30k pounds, and as such 2 GBU-57 Massive Ordnance Penetrator bunker buster bombs that are designed to destroy targets deep underground. According to Trump, five or six GBU-57s were released on the Fordow site, 30 Tomahawk land-attack cruise missiles were fired at Natanz and Isfahan. Israel had wiped out most Iranian air defenses in the eight days before the U.S. strike. While Trump said that Iran''s ''key nuclear enrichment facilities have been completely and totally obliterated'', Iran officials have been pointing to superficial damage only. Tehran''s nuclear regulatory agency stated that there was no sign of radiation contamination at the sites - confirmed by IAEA - and that it had taken precautions in anticipation of an attack. What is the reaction by countries? 1) U.S.: Trump, who had to return from the latest G7 summit to monitor tensions in the Middle East, said that the attack was to ''stop [...] the nuclear threat posed by the world''s No. 1 state sponsor of terror.'' Besides, Trump threatened to perform ''far greater'' attacks if Iran continues to block peace negotiations. 2) Iran: FM Abbas Araghchi called the US strike ''outrageous and will have everlasting consequences'' adding that ''Iran reserves all options to defend its sovereignty, interest, and people''. In retaliation, Iran launched ballistic missiles and dozens of drones at Israel. On June 18, Iranian Supreme Leader Ayatollah Ali...
What happened? We hosted the first day of a field trip to the 55th Paris Air Show featuring meetings with five companies in the Aerospace and Defence sector, including Hensoldt (=). The venue has 2,500 exhibiting companies from 48 countries that are expected to receive up to 300,000 visitors between June 16 and 22. BNPP Exane View: We draw three main conclusions for the defence companies in our coverage universe: 1) pan-European corporates do not appear to be convinced (yet) that the envisaged step-up in European defence spending to(wards) 3.5% of GDP is a given, not least due to uncertainties in regards to financing; 2) however, Germany is expected to be the key driver behind a ≥2.5x increase in procurement related military spending through 2030 as per our latest GDP defence spending framework; 3) overall willingness to cooperate among companies continues to take shape, as seen with e.g. Rheinmetall teaming up with Leonardo to address the EUR 20bn land vehicles opportunity in Italy. Germany expected to be the front runner, more balanced view on relevant defence spending countries: In line with our findings from our recent roadshow with Rheinmetall in North America, we note a distinctive less enthusiastic view on defence spending in those countries that are likely to find it more complicated to provide the respective funding for a swift step-up in defence spending through 2030 or earlier. Against that backdrop, we recall that Thales has struck a more balanced message highlighting the need for making a consolidated effort among member states. ''Whatever it takes'' appears to be taking effect, fast and at scale: Following Chancellor Merz''s ''whatever it takes'' speech in early March, and the subsequent political endorsement of/towards a 3.5% spending on defence, Hensoldt (=) and RENK (-) started to hike their 2030 targets with the release of their Q1 results. RHM''s CFO had pointed to an expected pick-up in order activity as of Q3, which was echoed by...
Historical European defence under-spending, geopolitical changes and likely less military support to NATO from the US are all powerful structural growth drivers for the defence sector DACH defence companies to disproportionately benefit due to 30-60% exposure to Germany as the fastest growth market in the sector Rel. preference: RHM (+) HAG (=) R3NK (-)
DACH defence stocks have gained another 50-60% since April on accelerated dynamics in regard to the political endorsement of/towards a 3.5% spending on defence. We have updated our GDP scenario and, as a result, upgrade our adj EBITA''30e forecasts by c. 10-20%. We continue to prefer Rheinmetall (+) as it still offers plenty of opportunities that we believe are not priced in. Based on KPI momentum vs valuation on a relative basis, we now see RENK as less attractive and thus downgrade to Underperform (from Neutral). For Hensoldt, our earlier cautious view was too bearish as we had underestimated the opportunity in Germany; we upgrade to Neutral (from Underperform). From bottom-up to top-down again? The path to(wards) 3.5% looks more credible today Let''s get straight to the point: we had taken too critical a view on funding, underestimating the geopolitical threat and the need to build up credible deterrence. The latest share price bounce was driven by Dutch PM Schoof confirming NATO chief Rutte''s proposal for a 5% quota, of which 1.5% for infrastructure. While some countries might fall short, the overall commitment has firmly edged up. League table update: we continue to see Rheinmetall (RHM) in pole position We still think RHM is best positioned both from a top-down and bottom-up view, with the strong organic set-up nicely complemented by strategic cooperations, while MandA remains a wild card. With our 2030 forecasts c. 20% above cons and our 3.1% GDP scenario (Germany: 3.5% / rest of Europe: 3.0%) pointing to a EUR55bn revenue potential, risk-reward looks favourable. However, we have switched our preference in this update: we u/g Hensoldt to Neutral, while we d/g RENK to U/P. Valuation: 50-70% hike in TPs driven by 10-20% EBITA uplift and lower discount rates While we keep near-term forecasts unchanged, we increase FY30e adj. EBITA by c. 10-20% and lift our TPs by ~50-70% to reflect 1) a more positive view on long-term visibility and 2) alower...
What happened? We hosted investor meetings with Rheinmetall''s CFO Klaus Neumann and HIR Dirk Winkels in New York yesterday, which confirmed unprecedented business dynamics are continuing suggesting not only timely receipt of orders following the NATO summit on 24-26 June, but also that execution might follow suit in a timely manner. As such, we feel reassured in our above-consensus estimates with an update of 2030 targets due at the CMD (18 November) at the very latest. BNPP Exane View: Demand/NATO summit: Irrespective of what might be exactly announced at the NATO summit, we understand that the identified capability gaps were shared with European NATO member states some 6 months ago. As such, the company did not only reiterate its view that Europe will head towards the earlier mentioned defence spending target of 3.5% of GDP, but also stated that it would expect first orders to come through as early as Q3. As such, RHM is confident with the EUR 55bn target for RHM Nominations (firm and frame orders) that was raised from c. EUR 40bn with Q1 results. Execution: An overall very constructive message in regards to delivering on envisaged 35-40% CAGR in defence in the wake of the experience built up over time highlighting that the new artillery plant in UnterluB (capacity: 350k rounds p.a. vs. initial 200k target; BNPPE(e) sales: EUR 1bn has been built within only 15 months and which can and will be used as a blueprint for other plants (eg Lithuania). For (tactical) vehicles the required ramp-up to meaningfully raise output is expected to take up to 2 years, not least as the supply chain typically needs to be build up accordingly adding that the much improved volume outlook is attracting ever more suppliers - both former and new ones including steel. Margins and FCF: The company does not expect any relevant change in segment margins over time - the exception being ES that is expected to benefit from mix shifting to higher margin air defence and...
“Just in-line” results from Rheinmetall might normally be taken as a bit of an opportunity for profit-taking. But the company has clearly started the year well, with relatively few tailwinds to flatter the results. And the statement implies scope to upgrade guidance later in the year. With the near-term pipeline of potential orders clearly increasing significantly, as both German and international defence requirements gradually become clearer, we retain our Buy rating, while acknowledging that the shares have (again) surpassed both our 12-month and 3-year price targets.
What happened? Rheinmetall''s Q1 orders/ sales/ adj. EBITA/ FCF pre-tax are unchanged vs. the pre-release on 28 April; EPS are +29% vs. BBG Consensus estimates. Please find our initial comment here. Guidance for FY25 was ''only'' reiterated, yet, both the decent Q1 release and wording suggests risk is to the upside: . Sales: EUR 12.2-12.6bn (BBG: EUR 12.6bn | LTM Q1: EUR 10.5bn); OSG target: c. 25-30% (BBG: 29%) . Adj. EBITA: c. EUR 1.9-2.0bn (BBG: EUR 2.0bn | LTM Q1: EUR 1.54bn); margin target: 15.5% (BBG: 15.8%) . Op. FCF: EUR 0.7-0.8bn as per a 40% EBITA-FCF conversion target (BBG: EUR 0.9bn | LTM Q1: EUR 1.0bn) BNPP Exane View: While the pre-release only pointed to 70% growth in sales and a 96% jump in op. profit at Defence, the final Q1 print shows that WAandVS were the key drivers behind strong group adj. EBITA. Firm orders reached EUR 3.4bn (-53% vs. BBG), but strong frame nominations offset here. Thanks to both, good execution and prepayments received FCF came in at a very strong EUR 0.3bn. While RHM has not altered FY25 guidance, the wording (''at least confirmed'') paves a clear way for what should be expected going forward. As the latest statements of NATO Secretary General Mark Rutte left no doubt that Europe should step up defence spending to min. 3.5%, risk-reward is still skewed to the latter, in our view. Commentary on the pipeline (slides #5/6) is equally encouraging, hence, we reiterate O/P. Defence orders were -11% y/y and 53% Cons., yet, offset by frame nominations of EUR 9.3bn. Both, the order backlog of EUR 62.6bn and RHM Nominations of EUR 11.0bn in Q1 were confirmed. The full-year target of EUR 30-40bn for RHM Nominations was raised to EUR 55bn (slide 6) with Germany playing a key role contributing 90%. Execution: Sales at EUR 2.3bn (+18% vs. BBG upon pre-release) were particularly driven by VS/WA (+93%/+65% y/y) - also due to the earlier mentioned pull-forward effects; PS weak (-6% y/y). Strong adj. EBITA / margin at...
What happened? According to Reuters, who refer to two sources familiar with the matter, German Defence Minister Boris Pistorius is aiming to hike the country''s ordinary defence budget to over EUR 60bn starting in 2025. BNPP Exane View: German defence budget composition: The total German defence budget, which amounted to EUR 79bn in 2024, thus equating to 1.8% of GDP by our calculations, consists of three buckets in total: 1) the ordinary budget, which is part of the country''s budget (2024: EUR 52bn), 2) the special fund (2024: EUR 20bn), and 3) Ukraine aid (2024: EUR 7bn). While the ordinary German defence budget has not been materially hiked since the start of the war in Ukraine (see table below), the gap towards the prevailing 2% NATO requirement has been mainly bridged by the respective contributions from the EUR 100bn special fund, which was passed by the German Parliament - requiring a 2/3rd majority - in June 2022 in reaction to the war (following the Zeitenwende speech of Olaf Scholz). Total defence budget might rise to EUR 87bn in 2025 for a GDP quota of 2.0%: In combination with the special fund and likely continuing contributions from the Ukraine aid budget, this would bring the total defence budget to c. EUR 87bn or 2.0% of GDP this year assuming 0.4% GDP growth y/y. While the respective contribution from the special fund has been defined (2025/26/27: EUR 21.6bn/ EUR 17.8bn/ EUR 15.9bn), we note that the related chunk from the mentioned Ukraine aid, which is part of the so-called Ertuchtigungsinitiative der Bundesregierung has not been quantified yet after having seen a sizable step-up to EUR 7bn in 2024 versus EUR 5bn in 2023. In the wake of the envisaged min. EUR 8bn increase in the ordinary budget, we would not rule out that the Ukraine aid contribution might revert to the 2024 level, hence, our expectation is that the total defence budget might not exceed EUR 87bn in 2025. Debt brake relaxed for defence spending on 18 March,...
What happened? RHM''s Q1 pre-released sales and adj. EBITA are some 20% above consensus (both Vara and BBG). Besides, the order backlog has reached EUR 62.6bn thanks to EUR 11.0bn in Rheinmetall Nomination in the quarter. Although not disclosed, both the better than expected op. profit and strong order pattern bode well for pos. FCF in the quarter, which would presumably be the first time ever, and occurring in a year with all-time high capex spent. Guidance for FY25 was ''only'' reiterated, yet, both the decent Q1 release and wording suggests risk is to the upside: . Sales: EUR 12.2-12.6bn (BBG: EUR 12.6bn | LTM Q1: EUR 10.5bn); OSG target: c. 25-30% (BBG: 29%) . Adj. EBITA: c. EUR 1.9-2.0bn (BBG: EUR 2.0bn | LTM Q1: EUR 1.54bn); margin target: 15.5% (BBG: 15.9%) . Op. FCF: EUR 0.7-0.8bn as per a 40% EBITA-FCF conversion target (BBG: EUR 0.9bn | LTM Q4: EUR 0.55bn) BNPP Exane View: Q1p sales - pull-forward effect at Defence drives the beat: Preliminary group revenue of EUR 2.305bn (+46% y/y) is solely driven by the defence operations that are said to be up almost 73% benefitting from (unquantified) pull-forward effects from the second quarter to the first quarter. These were apparently not visible at the time of the pre-close call on 8 April when IR pointed to Defence sales being up ~40% vs. flat for Power Systems (PS), i.e. mirroring the full-year target framework. We understand that this tailwind was broad-based as the recent discussion has been focused on ammunition restocking, air defence and digitalisation as the key areas for procurement. In turn, and assuming an intra-company sales of some EUR 150m share, this implies a double-digit decline at PS, yet, down only LSD sequentially. Q1p adj, EBITA some 20% ahead: At EUR 199m (margin: 8.6% | +20bp y/y), both Vara''s EUR 166m and BBG''s EUR 163m (margin: (8.5% / 8.7%) adj. EBITA beats expectations by ~20%. Growth at Defence reached 96% though implying adj. EBITA of c. EUR 210m / a margin of c....
Defence stands out as a poster child of the MEGA trade with rising global investor interest for a key structural winner. But, after the recent rally, we need to be more selective. ReArm Europe aims to mobilise significant funds - and the step-up in Germany''s defence budget after years of underspending will be a key driver. The NATO summit in June could help clarify where these billions will go. Our new work discusses potential timelines, allocation and win-rates, adding more granularity in a bottom-up approach. Rheinmetall (+) is our top pick with a further 35% blue-sky upside. But after the rally, we lower our ratings for RENK (= from +) and Hensoldt (- from =).
Rheinmetall’s defence revenues grew c.50% in 2024 and, following 2024 Q4/FY Results, we increase our revenue forecasts for the company by an average of 26%pa to 2028e, and our operating income forecasts by an average of 34%pa.Defence spending is already accelerating in many of Rheinmetall’s key European markets. Weapons & Ammunition remains the company’s most profitable division, with near-30% margins, but rising German digitisation and air defence spending has transformed both volumes and profitability for Electronic Solutions, while Vehicle Systems is becoming a strong mid-cycle play, with Italy now a major growth market.Our forecast increases reflect our reassessment of the positive timing and impact of recent orders, especially from Germany, as well as a structurally-reduced risk of contract/programme delays across Europe in the light of the dramatic deterioration in US-European relations.We cannot, as yet, factor into our detail forecasts the next stage of European rearmament, and especially Zeitenwende 2.0, the likely next very large German defence fund, variously reported to be as high as €200bn – there remains a complete lack of detail on new budgets, timings, and equipment requirements.But we believe that we can model, at least to the right order of magnitude, the potential drop-through to Rheinmetall’s valuation of various potential increases in European defence spending as a % of GDP. Our analysis suggests that an increase to 3% of GDP by 2030e would, given a greater proportion of budgets dropping through to procurement, at least initially, result in an effective doubling of funding for equipment, and likely a far higher proportion being spent with European suppliers rather than imports from the US. Our new target prices only assume that European defence spending reaches 2.5% of GDP in 2030e (vs. our previous c.2.0%) – on this basis, our 12-month target increases from €536 to €1,318, and our 3-year target from €641 to €1,510. European defence spending that reached 3% of GDP by 2030e would give a targets of €1,755 and €2,012 respectively, highlighting Rheinmetall’s continued highly attractive leverage to any further acceleration of the rearmament super-cycle – we retain our Buy rating.Next events: Q1 Results, 8 May, NATO Summit, 24-25 June.
Our forecasts and target prices are under review following Rheinmetall’s FY2024 Results, and in light of the greatly-changed European defence market environment following the Munich Security Conference and Trump/Zelensky meeting.2024 Q4 Results were slightly below our forecasts at the operating line, almost entirely because of delays to c.€200m of ammunition into 2025 due to an accident at the company’s South African business.But Q4 cashflow was nearly €300m better than our forecasts, reflecting strong order intake and customer advances.No change to the company’s broad-brush targets of c.€20bn of 2027e revenues, and “vision” of c.€30bn revenues for 2030 – given Power Systems sales (almost all to the automotive industry) expected to be flat or down on the current €2.0bn level, this effectively implies c.30% CAGR for the defence businesses to 2027e, and c.23% CAGR to 2030e.2025e guidance is consistent these targets and “vision”: potential record order intake of €30bn+ (benefitting, but only in part, from c.€6bn of German military digitisation contracts slipping from 2024 into 2025), 35%-40% Defence revenue growth, and c.15.5% operating margins.Q1 is, however, likely to be unusually strong, with the South African ammunition deliveries supporting both margins and cashflow, and the two large digitisation contracts already booked. This is a far cry from the 2010-2019 period, when RHM typically had massive cash outflows and negligible profits in Q1, as it built stock for H2 deliveries for both automotive and defence customers.A particularly interesting question for the call, and discussions with management thereafter, is whether (clearly, with the massive benefit of hindsight), the company’s c.$1.0bn acquisition of LOC Performance in the US was worth it. Perhaps more importantly than the sharp deterioration in relations between the US and Europe (which makes a European defence company winning major US prime contracts look an ever-longer shot), we point to the changed US defence priorities, which have massive de-emphasised spending on US heavy land force modernisation. Fortunately, the rise in European defence spending in our view more than outweighs this.
What happened? Rheinmetall''s Q4 orders/ sales/ adj. EBITA/ EPS came in -13%/ -6%/ -2%/ -17% vs. BBG Consensus estimates. Guidance for FY25 was introduced - all guidance parameters for FY24 were achieved: . Sales: EUR 12.5-13.0bn (BBG: EUR 12.7bn | LTM Q4: EUR 9.8bn); OSG target: 25-30% (BBG: 30.2%) . Adj. EBITA: EUR 1.9-2.0bn (BBG: EUR 2,056m | LTM Q4: EUR 1,478m); margin target: 15.5% (BBG: 16.2%) . Op. FCF: EUR 0.8bn as per a 40% EBITA-FCF conversion target (BBG: EUR 0.4bn | LTM Q4: EUR 1,023m) BNPP Exane View: After Renk''s and Hensoldt, RHM is the last German defence company to report Q4 results, which are a touch below Cons for op. profit, but better for FCF. While the print and ''25 targets support consensus for 25 (for both PandL and FCF), Europe''s commitment to step up defence spending to min. 3%, if not 3.5%, risk-reward is still skewed to the latter, in our view. Commentary on the pipeline (slides #6) is equally encouraging seeing an av. annual order potential of EUR 55-100bn in 25-30; note that RHM trades at ~6x EV/EBITA based on a 3.0% quota in our 2030 GDP scenario. Defence orders were +40% y/y vs. Cons. at 31%. The order backlog has swollen to EUR 55bn at the end of Q4 with RHM Nominations at EUR 5.4bn / 26.8bn in Q4/FY. While the earlier guided EUR 60bn backlog target has thus not been met due to disruptions in parliamentary decision-making, RHM expects full catch-up in FY25. Execution: Q4 sales at EUR 3.5bn (-6% vs. BBG) was driven by the WA segment (70% y/y), while VS (34% y/y) was softer; PS still weak (-15% y/y). Adj. EBITA / margin at EUR 773m / 22.2% (-2%/ +87bp vs. BBG); drivers: WA (320bp ahead), while VS was -480bp vs. BBG (mix related). FCF was strong at EUR 967m (125%/69% vs. adj. EBITA in Q4/FY) given strong op. profit / seasonal NWC relief (down EUR 459m q/q). 2025 guidance: RHM has overall delivered on its high promises / expectations with FY24 sales at EUR 9.8bn (vs. ~10bn guided | +36% y/y) and adj. EBITA of EUR 1.48bn...
What happened? After the US'' decision to suspend all military aid to Ukraine, without informing European and Nato allies in advance, the European Commission and the likely incoming Grand Coalition, are targeting a material increase in defence spending to min. 3%, if not 3.5% of GDP based on the latest available data and statements of key decision makers. Our 2030 GDP scenario sees RHM (+) and R3NK (+) trading at ~6x EV/EBITA and HAG (=) at ~7x based on a 3.0% quota. BNPP Exane View: EU aiming at additional defence spending over EUR800bn over the next 4 years: According to a letter by European Commission (EC)''s President, Mrs von der Leyen, relaxed spending rules are targeting an increase in defence spending (ReArm Europe) by c. EUR650bn over four years [in fact, an incremental 1.5% of GDP would imply c. EUR0.25bn p.a. based on EU''s c. EUR17trn GDP in 24e], which shall be complemented by bonds worth EUR150bn. The latter aims at strengthening pan-European capability domains [such as] air and missile defence, artillery systems, missiles and ammunition drones and anti-drone systems ; but also to address other needs from cyber to military mobility as per Mrs von der Leyen''s speech. Besides, EC is pushing for better boundary conditions, among others by eliminating existing restrictions for support to large enterprises in the defence sector and by improving financing via EIB and private capital. EU spent 1.6% of GDP or c. EUR279bn on defence in 2023 acc. to EDA. A EU defence summit is due on Thursday. Germany - c. EUR400bn for defence over 10 years: In parallel to the efforts under way at EU level, the leader of the Union parties, Mr Merz, stated that the motto ''whatever it takes'' must now apply to the defence sector, which is supported by SPD. In this regard, defence spending exceeding 1% (2024: 1.8%) shall be exempted from the debt brake (hitherto set at 0.35% of GDP, except in emergencies), without providing a target for the spending quota; yet, the...
Talk of a material expansion of the NATO defence spending target has pushed DACH defence stocks up by c. 40-55% YTD. Our 2030 scenario analysis shows the best risk-reward at Rheinmetall (+), which remains our top pick due to its product and regional diversity plus MandA potential. We continue to like Renk (+) after the share overhang has been removed and stronger-than-expected ''24 results, while we remain Neutral on Hensoldt given less upside after the recent rally (Q4 due on 27 Feb.). 2030 GDP quota scenario: +50bp drives Europe procurement spending up by min. EUR70bn Our 2030 scenario analysis uses various assumptions for GDP growth, the defence spending quota, the procurement share, and the hit rate by company to illustrate what revenue and EBIT level might be possible depending on where defence spending is heading. In short: a 50bp hike of the GDP quota implies a min. EUR20bn/EUR50bn uplift in procurement spending in Germany/rest of Europe. League table: hit rates and changes in offering puts Rheinmetall (RHM) in pole position RHM has historically had the relatively highest hit rate in both Germany/rest of Europe, which should further expand due to rapid capacity expansion (esp. in ammunition), the dive into new applications (Air Defence, digitalization), and MandA support. Our base case using the mid-point of a 2.5-3% GDP quota sees its 2030 EBIT up 60% vs. our base case, followed by 48% at HAG, and 36% at R3NK. Valuation: 2030-based target multiple and DCF approach drives our TPs up by c. 35-55% The defence sector is (normally) quite slow moving; hence, changes to the GDP quotas for defence spending are unlikely to impact fundamentals before 2027, if at all. To strike a balance between the already attractive outlook through 2027 and the potential in outer years, we assess fair values based on our 2030 GDP scenario of 2.5-3% using unch. target EV/EBITA multiples of 12x for RHM and 11x for RENK/HAG, which we have discounted back to YE25. We...
What happened? Beyond the echo that the speech of US Vice President JD Vance has provoked at the Munich Security Conference, there has probably never been a stronger agreement in Europe since the Cold War to further step up its investments from the current level of c. 2% of GDP. While Mr Trump''s request for 5% is unlikely to be (ever) met, commentary of EU politicians and the industry calls for a step-up to 2.5-3%, which has pushed European defence stocks 20-40% higher YTD, and we note that the German election debate shows a strong defence commitment of the established parties. BNPP Exane View: Industry points to a step-up to 2.5-3% in Germany: RHM''s CEO, Armin Papperger, stated in an interview with Reuters that an increase of the German defence budget from ~2% to 2.5-3% would translate into c. EUR 60-70bn in defence investment p.a. To put the numbers into perspective: Germany should have spent approx. EUR 35bn on procurement (ordinary spending plus special fund) or 0.9% of GDP in 2024 as published in our December sector note Another line of defence. A rule of three would thus imply that a 50bp increase in the GDP quote for defence spending and assuming that 100% is going into procurement would drive the annual spending almost EUR 20bn higher. Hence, a 2.5-3% quota could move the total procurement spending from c. EUR 35bn to EUR 55-75bn c.p. thus backing up RHM''s CEO. The European perspective: In 2023, Europe including the UK and Eastern Europe, yet, excluding Russia, spent c. EUR 400bn on defence, i.e. ~7x as much as Germany, equating to a 2% GDP quota according to SIPRI data. While we note that 2024 should have been further up, we triangulate that any 50bp step-up in the GDP quota would - all else equal - trigger a EUR 100bn increase in defence spending. Historically, EU member states have spent c. 20% on procurement / military equipment, but we would - as for Germany - assume that the lion''s share of any step-up will go into this bucket. ...
What happened? Rheinmetall (RHM) is scheduled to report Q4 2024 earnings on 12 March 2025. While we have briefly spoken to the company, our interaction served to discuss the latest developments since the Q3 release on 7 November and to recap on mgmt. statements that have been made since. The comment below should be read as our interpretation of the discussion rather than specific company commentary. Guidance is unchanged. BNPP Exane View: Demand: With Q3 reporting, the FY24 target for the so-called RHM Nomination was widened to EUR 30-40bn after the company had pointed to c. EUR 40bn with the Q2 release (up from EUR 28-36bn guided initially). However, the Q4 order announcements did not include any contribution from the TAWAN digitalization project, which RHM put at c. EUR 7.5bn in its Q3 slide deck, i.e. we consider it likely that delays in the parliamentary decision-making process - following the end of the former traffic light coalition - as earmarked by the CEO on the Q3 call actually are likely to have played out. In short, while BBG''s EUR 9.5bn order intake estimate might thus be too high, it is our impression that this is solely a timing effect, and we acknowledge that several sizable orders have been recorded in the meantime. Sales: In order to deliver on guided sales of c. EUR 10bn for the full-year, RHM needs to deliver Q4 revenue of c. EUR 3.7bn, ie up ~45% y/y, which is where VA has settled with a forecast of EUR 3.72bn (+46% y/y) vs. our EUR 3.65bn (+43% y/y). In addition to the seasonal profile calling for a material uptick in Q4, which historically has contributed c. 35% to full-year sales (and as much as c. 60% for adj. EBITA), we recall that the CEO had pointed to a ''very intense fourth quarter especially in the Weapon and Ammunition and Vehicle Systems'' segments. Adj. EBITA: Besides the comments in regard to the strong top-line acceleration, the CEO specifically pointed to the Q4 revenue target at WA of EUR 1.34bn, which is only...
Historical defence under-spending in Europe, geopolitical changes and likely less military support to NATO from the incoming US administration are all powerful structural growth drivers for German defence players. Against this backdrop, a potential ceasefire in Ukraine should only have a temporary impact, we think. Rheinmetall (+) is our top pick given highest visibility and a superior growth profile. We launch coverage on recently IPO''ed Renk at Outperform and on Hensoldt at Neutral. Market leaders in their field of activity - Rheinmetall is our preferred play All three players are confirmed leaders in their respective fields, but based on our benchmarking analysis, we see RHM enjoying the clearest growth drivers, notably from ammunition restocking needs, and offering the most balanced business mix. We prefer RHM (+) over R3NK (+) and HAG (=). Rheinmetall - Still levers to pull. Reiterate Outperform, TP lifted to EUR760 (from EUR640) RHM, a leading defence system integrator with margins in the mid/high teens and offering best-in-class visibility (Q3 orderbook 4x sales), saw its share price double in 2024. Still, the targeted ~25% sales CAGR24-27e and 300bp margin expansion remain underappreciated. Our TP implies c.12x EV/EBIT 26e and c.6% FCF yield 27e. We see potential opportunities ahead (see inside). Renk - Leader at the price of a laggard. Initiate at Outperform, TP EUR28 Renk ranks #1-3 globally in mission-critical drive technologies for the defence sector (70% of sales). Beyond its EUR4.8bn order book and 1.1x b:b ratio YTD, growth at customers points to 15% org. sales CAGR through 27/28e, not yet reflected in Cons. The overhang risk from Triton''s 34% stake seems priced in, while tailwinds from large vehicles programs could surprise to the upside. Hensoldt - What''s next? Drivers seem to have played out. Initiate at Neutral, TP EUR39 The largest pure play defence electronics components solutions provider in Europe benefits from rising...
What happened? RHM is hosting its CMD in Rome; after the dinner with mgmt. yesterday, and a plant tour earlier today, the slides of the CEO have just been released suggesting c. 20% upside to Cons.'' adj. EBITA 2027e; yet FCF is rather in line. BNPP Exane View: The new mid-term targets for now FY27 (rolled forward by 1Y) materially beat Cons. with implied group adj. EBITA of EUR3.6bn - based on a ~18% adj. EBITA margin target (was: 15%) applied to sales of c. EUR20bn (VA Cons.: EUR17.3bn) - sitting 14% above VA''s EUR3.15bn (margin: 18.2%). Yet, based on the respective targets, we reconcile implied group adj. EBITA of c. EUR3.3-4.3bn (6-37% above VA | margin: c. 18-20%) with the positive deviation led by VS and ES, while WA is widely in line. Yet, the implied target for FCF 27 is EUR1.3-1.7bn (VA: EUR1.5bn) as RHM has lowered the cash conversion target from op. profit to 40% (was: 50% / VA: 48%) implying a 6-8% yield 27e though. Running the numbers by core KPIs and comparison with consensus . Segment targets imply group sales of c. EUR18.5-21.5bn (sales CAGR 24-27e: 23.29% | based on guided sales 2024e of c. EUR 10bn), 16% above VA Cons.'' EUR 17.3bn with the segment targets implying a 7-24% range; key growth drivers: VS and ES are the key deviators to the upside with the EUR8-9bn / 4-5bn sales targets c. 30%/40% above VA; the framework for WA / PS is widely in line with market expectations at first glance (see tables below). No detail provided on whether the sales target includes MandA related contributions, yet, slide 32 puts expected U.S. sales at c. EUR2bn (24e: c. EUR0.5bn) suggesting Loc Performance - closing until YE24e - is baked in. . As per the new op. margin target of c. 18% vs Cons.'' 18.2% (the prior target had looked at 15%, yet, that did not include the new artillery ammunition plant in UnterluB), implied adj. EBITA is seen at EUR c.3.6bn based on the official c. EUR20bn sales target, yet, the bottom-up based op. profit is rather EUR3....
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)...
What happened? Rheinmetall''s Q3 orders/ sales/ adj. EBITA/ EPS came in -46%/ +1%/ -2%/ -34% vs. VA Consensus estimates. Guidance for FY24 was amended upwards: . Sales: c. EUR 10bn (VA: EUR 9.98bn | LTM Q3: EUR 8.83bn) . Adj. EBITA: c. EUR 1.5bn, up vs. c. EUR 1.4-1.5bn before as RHM now expects a margin of c. 15% vs. 14-15% guided with the Q2 results release (VA: EUR 1.52bn/15.2% | LTM Q3: EUR 1.24bn/14.1%) . Op. FCF: ≥ EUR 600m (vs. EUR 560-600m) as per a ≥40% (vs. c. 40%) conversion (VA: EUR 625m) BNPP Exane View: After Hensoldt''s earnings release yesterday, RHM is the second German defence company to report Q3 results, which are below for firm orders, but about in line for adj. EBIT and strong for FCF. While the print does not call for major changes to Cons. PandL/CF estimates for 24, a likely pick-up in order momentum in Defence in Q4 plus the envisaged closing of the Loc deal in the U.S. implies there might be technical u/s risk to 26 targets; note that its CMD is due on 18/19 Nov. Defence orders were EUR 2.4bn vs. Cons. at EUR 4.4bn. Yet, the order backlog has swollen to EUR 51.9bn at the end of Q3 with RHM Nominations at EUR 6.1bn / 21.4bn in Q3/9M. Based on the c. EUR 60bn backlog target at YE24 that was reiterated with the announced exco changes yesterday, RHM is expecting a material uptick in order activity in Q4. Sales growth was +40% y/y vs. Cons. at 38%, driven by VS/ES (+88%/+41% y/y), while WA suffered from pull-forward effects in Q2 with Q3 ''only'' up 14% y/y and PS down 11% reflecting Auto woes. Adj. EBITA margin was 12.5% (+260bp y/y | +70bp q/q) vs . Cons.'' 13.0% with abs. adj. EBITA thus 2% short of VA, mainly due to the pull-forward at WA in Q2 (Q3: 7% VA), PS weakness and higher overhead costs. FCF was strong at EUR 137m despite cont''d investments. 2024 guidance was amended upwards reiterated implying a massive Q4 with ~45% sales growth (9M: +36%) and adj. EBITA of c. EUR 800m (+50% y/y) for a margin of c. 21% reflecting 1) a...
What happened? In today''s meeting, the supervisory board decided to appoint Klaus Neumann (54), currently Head of Accounting at RHM, as group CFO, thus succeeding Dagmar Steinert (59), who is leaving the company effective 31 Dec. 2024, one year ahead of original contract expiry. Additionally, the board extended the contract with CEO Armin Papperger (61) by another five years until YE29. Earlier this year, on 15 May, RHM announced the appointment of Dr. Ursula Biernert (55) as new CHRO and Labour Director with effect from 1 October 2024. Last not least, the board has expanded the executive committee by the newly created position of a Chief Operation Officer (COO), a role that will be taken over by Rene Gansauge (51), previously Head of the Weapon and Ammunition division, starting as of 1 January 2025. BNPP Exane View: In the related press release, RHM states that the exco changes are in response to ''the increased demands that the enormous growth of Rheinmetall brought in the wake of the much-discussed turning point in history (''Zeitenwende'') and against the backdrop of the rapid internationalisation and expansion of Rheinmetall''s business activities'' as per the guided revenue step up to c. EUR 10bn in FY24 and the earlier contemplated order backlog increase to c. EUR60bn that is expected to allow group revenues of c. EUR 20bn ''in just a few years''; note that CEO Papperger pointed to a required revenue of EUR 20-30bn in 02/24 to successfully compete globally, which was raised to EUR 40bn in 08/24. In order to ''strike a new balance between continuity and innovation'' and to address the challenges coming along with the implementation of its internationalization strategy that in turn requires the successful integration of 1) new production sites around the world and 2) of major global acquisitions (cf. Loc deal in the U.S. or Expal in Spain), the board has decided to not only expand the exco by creating the role of a COO, but apparently also to change...
What happened? RHM hosted a call with mgmt. to discuss the rationale and potential related to the announced acquisition of U.S. based Loc Performance Products for an EV of USD 950m (debt: USD 360m); please find our initial reaction here / disclosed presentation materials here. We understood that the Manufacturing Readiness Level 7 is a mandatory prerequisite to tap into the U.S. XM30 (IFVs) and CTT (trucks) programs with a respective revenue potential of USD 45bn / 16bn. According to mgmt., the asset has generated revenues of around USD 200m p.a., which are expected to rise to around USD 400m in FY24 with the standalone case based on the existing order backlog allowing 26 revenues of USD 650m at a 16-18% EBITDA margin. Against that, RHM has calculated a synergy case based on leveraging the business via filling existing Loc''s production capacities through RHM''s network foreseeing revenue of c. USD 820m by then. If RHM was to tap into one of the two mentioned programs the revenue opportunity is seen at USD 2bn. C. 30% is agricultural related, the other c. 70% is from the defence sector with the aftermarket share at c. 30% that might rise towards 50%. Coming from private equity, with whom RHM has been in exclusive negotiations, margins appear to have meaningfully improved lately to mid-teens levels for EBITDA. Balance-sheet wise, the book value of Loc''s equity is just above USD 100m with goodwill post-deal indicated at around USD 300m, while intangible assets should also be meaningful. BNPP Exane View: Following the call we take a positive view on the deal as even if only the standalone case was met, the deal looks nicely accretive with our adj. EBITA 25/26e moving up by 3%/4% on a pro-forma basis (assuming PPA of EUR 50m/30m and the net financial result initially worsening by EUR 20m as RHM intends to use existing cash and new debt to finance the deal) resulting in an increase of our current EPS 25/26e (company-definition) by 6%/9%. Needless to...
What happened? RHM has announced to acquire U.S. based Loc Performance Products, a full-service provider of driveline, suspension, track systems, rubber products, armor products and fabricated structures for vehicle platforms for an EV of c. EUR 860m, which might imply c. 2x EV/sales based on our estimates. Based on expected NDT/EBITDA of 0.4x at YE24, RHM should be able to fund the deal via debt. BNPP Exane View: Through the deal, RHM aims at not only expanding its U.S. capacity, technological portfolio and workforce, but also to further improve its chances to tap into the XM30 (IFVs) and CTT (trucks) programs with a respective revenue potential of USD 45bn and USD 16bn. Note that a conference call with mgmt. is due at 14.30 CET today (register here) 1) What does Loc Performance Products, LLC do? Loc profile: Loc -founded in 1971 in Taylor, Michigan - is a full-service provider of driveline, suspension, track systems, rubber products, armor products and fabricated structures for vehicle platforms. It serves 250+ customers and sells direct to the Government, its major prime contractors, as well as vehicle manufacturers in agriculture, construction, mining, locomotive, mass transportation, and oil and gas industries. Loc employs around 1k staff and has 4 production facilities, all of which are in the U.S. (Plymouth HQ, Lansing, Lapeer, St. Marys). Product offering: Loc makes military track systems and is ''the only qualified supplier for every major Ground Combat Vehicle platform in the U.S. Army fleet'', including the M1 Abrams Main Battle Tank and M2 Bradley Fighting Vehicle. Besides, Loc offers fabricated structures (armored cab, hull structures, turret structures), mechanical systems (driveline and suspension systems), armor products (armor doors, turret hatches and underbelly armor) as well as rubber tracks (Trackman) and other rubber products (Wheels and Mounts, Hay Conditioner Mower Rolls, Bladder Bags). 2) What is the deal rationale for RHM? ...
Rheinmetall preannounced on 24 July that Q2 Results were well ahead of the then-consensus, so the published results had few surprises on the headline numbers themselves.Q2 orders were €11.4bn, a book to bill of 5 times. The company is guiding to c.€40bn of orders for the year (B2B 4x), predominantly Defence, and primarily from Germany and Rest of Europe, and for Ukraine, implying c.€20bn more orders in H2.Revenues of €2.2bn were 9% ahead of our €2,050m estimate (before the preannouncement), benefitting from two munitions contract deliveries being brought forward, an initial Q2 contribution from Expal, and strong growth in the rest of the defence businesses. All these dropped through with very strong leverage to profits.Management were confident on the call about both H2 order intake, and revenues, pointing to 91% backlog cover, vs 86% at this stage of 2023. Our key short-term concern is the ability of Germany, in particular, to take delivery of such high amounts of equipment (especially trucks), and fully process all the payments by end-Q4.Our forecasts therefore appear low for the current year vs. (maintained) guidance of c.€10bn revenues and 14%-15% margins, but we see revenues accelerating through at least 2026E, and margins reaching 17% by 2028e.Next events: Q3 Results, 7 November, Capital Markets Day 18-19 November.
While sales and adj. EBITA had been pre-released on 24 July, we positively view the segment details as well as the level of received orders vis-a-vis the order backlog covering c. 5x expected FY24 revenue and strong OpFCF of EUR 170m. Commentary on the conference call moreover points to a strong pipeline across the defence business, and mgmt. equally reassured on execution in H2, for which the Q2 performance has probably been the best proof. Our model update prompts our new TP of EUR 585, and while the beat and raise story might not continue forever, RHM has its role to play in modernizing Europe''s defence sector, for which 17x/13x P/E 25/26 looks too low. O/P. Key takes from the call - positive colour on orders, mid-term margins and FCF dynamics 1) Demand: the pipeline remains well filled both in Germany and abroad, spanning all 3 defence segments; 2) Profitability: as the renegotiated truck order for the German Army demonstrates, pricing remains very healthy, which is supported by RHM''s often dominant position and fixed terms for both volume and price in its ammunition business through 2026; 3) Optionality: its healthy balance sheet and strong FCF generation allow for both complementary MandA deals and cash return to holders. Model update - MSD uplift to adj. EBITA and OpFCF 25-27e led by WA and ES Following the inclusion of the segmental details for Q2 and the related comments by management on the call, we have fine-tuned our model assumptions prompting a c. 4% uplift of our adj. EBITA and OpFCF 25-27e. The actual execution momentum and aforementioned opportunity related to MandA might represent further upside. We find it too early to bake this in, but we remind investors that the CEO has previously stated to be aiming at sales of c. EUR 20bn by early 2030. New TP is EUR 585 (from EUR 540) - O/P on strong visibility and still-attractive valuation Our SOTP-based TP moves to EUR 585 based on an unchanged target EV/EBIT multiple of 10x for Power...
We have made very extensive changes and upgrades to our forecasts for Rheinmetall: as well as reflecting those Defence orders received in late-2023 and Q1 2024, key drivers of our new numbers include a structural change to our assumption about the effects on Rheinmetall of sustained European rearmament as a consequence of the Russian invasion of Ukraine.Our revenue forecasts increase an average of 11%pa to 2028e, but >20% in the out-yearsOur EBIT forecasts benefit both from the higher sales estimates and greatly increased mix and margin assumptions, rising >40% for 2027e-on. We have also reassessed the likely duration and magnitude of European rearmament given the increasing possibility of a re-election of President Trump, and hence a weakening of the US commitment to NATO. We expect European NATO expenditures to rise to closer to 3% of GDP than the current 2% target, or even the 2.5% aspirations of an increasing number of countries. We put our price targets under review on 14 March 2024, at the time of the 2023 FY Results, given our need for a substantial reassessment of our estimates. Our new 12-month target is €536Our new 3-year target is €614 With 23% upside on a 3-year view, and the likelihood of further large defence orders, especially for ammunition, given the continued upwards momentum in European defence spending, we retain our Buy rating.Next event: Eurosatory defence trade show, Paris, 17-21 June
We have adjusted our forecasts following the release of Rheinmetall''s Q1 2024 results, which have been published today. Please note that we have only altered our quarterly forecasts by division, but left our full-year estimates unchanged, which are broadly in line with consensus. We do not consider the changes to be material; our rating is unchanged.
While the 6% op. profit beat vs. cons. was driven by asset revaluation, we liked the order and FCF strength in Q4. Moreover, the call left no doubt that RHM acts in a seller''s market is likely to last for many years as indicated by a ''24 order pipeline in Germany of EUR 30bn alone, i.e., 6x ''23 sales. As the lion share of capacity expansion is equally financed by customers, the beat and raise story has not lost any of its steam. Following our latest update, we make only minor adjustments this time; yet, with c.10% upside risk to Steet adj. EBITA 25/26e and valuation still moderate at 13x/10x in 24/25e, we maintain O/P with a new TP of EUR 540 (vs. EUR 520 prior), implying ''26e PE of 14x. Key takes from the call - positive colours on orders, mid-term margins and FCF dynamics The call has provided positive colours on 1) the order pipeline that appears to approach EUR ~40bn vs. an earlier guidance of EUR 28-36bn for this year; 2) further margin progression, which supports our above-cons. forecasts (adj. EBITA ''26e BNPP / VA: EUR 2.5bn/2.2bn); 3) very good FCF control thanks to DPs/EU capex grants allowing selective MandA with also the U.S. in focus. Model update - minor changes at group level, WA about to contribute ~50% to group EBITA Based on the framework by segments, we have tweaked our assumptions marginally noting that the total would call for adj. EBITA ''24 of c.EUR 1.5bn vs. the group target of EUR 1.4-1.5bn. Of greater importance though is the mid- to long-term outlook, suggesting that even our EUR 2.5bn op. profit in ''26e might prove to be conservative, with any EUR 1bn higher defence sales adding c.EUR 0.2bn to op. profit and the estimated total sales of up to EUR 20bn vs our EUR14.5bn forecast. Our TP moves to EUR 540 - O/P on good visibility, CMD as catalyst and attractive valuation Our SOTP-based TP moves to EUR 540, at the top-end of the Street. With order and hence earnings momentum remaining strong which should be further manifested...
Three months on from reiterating our constructive view in Dec 23, RHM shares have exceeded our previous TP. In this note, we review key investor debates as well as why we believe that the shares have further headroom, even from here. RHM combines sector-leading structural earnings growth with short-cycle momentum, which is not fully reflected in the current valuation of 16x/12x P/E 25/26e for an estimated 38% EPS CAGR 23-26e. Based on our updated forecasts (EBITA 25/26e raised by 9%/15%), our 26-based SOTP gives our new TP of EUR520. O/P. Key investor questions - why the rally, why is RHM different and how far can it go? While neither the structural need to catch up with the 20Y+ of under-spending on German defence nor Mr Trump''s anti-NATO stance and the related pressure on the EU to spend more are necessarily new, they have brought RHM into investors'' focus - as has the recent listing of RENK, in our view. While we address the upside question below, we believe RHM has a unique profile, combining multi-year vehicle and electronic solutions programmes with a leading short-cycle ammunition business. Model update - ES deep-dive and new ammunition capacity drives EBITA 25/26e up 9/15% In this note, we analyse RHM''s air defence business (bulk of ES segment), leading us to conclude that the opportunity here - both from a revenue and EBITA perspective - remains underestimated. We have reflected the latest artillery capacity expansion for an additional c. 200k rounds p.a. in its globally leading ammunition business, prompting our new adj. EBITA 26e of EUR2.4bn (vs. EUR2.1bn/VA consensus: EUR2.1bn), which should allow OpFCF of EUR 0.9bn. 1-2Y FW looking view ignores potential in ammunition and air defence - new TP is EUR520, O/P While the shares are up c. 50% YTD (3x since the Ukraine war), we believe the market still underappreciates the structural earnings improvement: 1Y FW P/E has only marginally expanded to 16x currently vs. 14x in 2014-23. Our...
We draw 3 conclusions from the latest CEO interview and the inauguration ceremony for RHM''s new artillery plant: 1) 2026 sales should increase towards c. EUR 15bn, which implies ~25% upside risk to Street''s EBIT 26e in wake of a more favourable mix; 2) RHM sees itself as an active consolidator with critical scale requiring future sales of EUR 20-30bn - the lower bound the goal for early 30s - to be relevant also versus U.S. defence peers; 3) mid-term capacities largely available, long-term supported by healthy FCFs thanks to mix and prepayments. If RHM were to deliver on those goals, EPS 26e of c. EUR 40 were in reach for 9x P/E, even after yesterday''s 4% move. O/P. Interview ties into today''s groundbreaking ceremony for new artillery plant CEO Papperger gave an interview to German daily Handesblatt, i.e. ahead of the groundbreaking ceremony - including German Chancellor Scholz, thus underlining RHM''s strategic relevance - for a new artillery production plant at its Weapon and Ammunition core hub in UnterluB. In the press release, RHM is pointing to an output of c. 50k/100k rounds in 2025/26e that should rise to 200k in the mid-term bringing its total artillery capacity to c. 700k. This compares to a combined capacity of 350k rounds as disclosed when acquiring Expal in 11/2022 (RHM: 100k / Expal: 250k). Mid-term sales target upgraded towards EUR 15bn from EUR 13-14bn, ammo the key driver While RHM had raised financial targets at the CMD in 11/2023, the CEO now stated to target to expand sales towards EUR 15bn by FY26. Assuming that this is primarily driven by the high margin ammunition business as suggested by the timing of the new (verbal) goal, we calculate potential EBIT of c. EUR 2.3-2.7bn, i.e. up ~20% vs. the latest range and c. 25% vs. VA consensus. Attractiveness of investment case underlined by implied P/E 26e of ~9x Also, after a 3-fold increase in the price since 04/2022 (YTD: +22%), the shares continue to screen attractive, both vs...
Given ongoing budget discussions, we have analyzed Germany''s national budget and defence spend in detail. With geopolitical conflicts not abating at all, but support from the U.S. potentially fading, the role of Germany makes c. 2% of GDP spend, in line with the NATO target, almost inevitable in our view, which implies an incremental revenue opportunity of c. EUR 3bn for RHM, in Germany alone. We thus reiterate our O/P and EUR 350 TP for RHM, which remains underappreciated as the stock has barely rerated despite a tripling in the share price since the Ukraine war started. Prior underinvestment and geopolitical conflict push Germany to spend ~2% of GDP on defence While the latest MOD release in regards to the exemption of both the ordinary defence budget and the special fund from the general budget freeze provided a certain relief, there are still question marks around 2024 and beyond. Following our analysis of the German defence spend in prior years and in light of the country''s responsibility in Europe and globally given ongoing geopolitical conflicts, we believe Germany will (have to) spend c. 2% of GDP on defence, up to and beyond 2026. 15% share of wallet implies c. EUR 3bn revenue opportunity, in Germany alone Contributions from the special fund to the total defence spend have only just started and are expected to more than double y/y to reach EUR 19bn in 2024, getting budget close to the 2% GDP target. As the last NATO summit has foreseen spending at least 20% of the total budget on military procurement, RHM''s historical share of wallet of ≥15% implies a credible incremental sales potential of c. EUR 3bn vs. total defence sales of just above EUR 6bn in 2023e. Minimal rerating, yet, no premium despite significantly outperforming peers on core KPIs Benchmarking RHM against selected peers and the European Aerospace and Defence sector shows that despite doubling its operating margin and superior EPS growth, its 1Y FW PE is only up c. 10% versus the...
Rheinmetall has hosted an impressive CMD outlining strong mid-term prospects. It has increased its mid-term sales target by ~20% and the EBIT margin target by 200bps, largely supported by strengthening operating leverage in defence. The company is open to selling its Civil businesses (now regrouped under the Power Systems segment) if it receives a fair offer. The CMD confirmed our positive view on the company, now beyond 2026 also.
Rheinmetall published strong 9M results largely driven by the VS and W&A divisions. Q3 sales rose by 24.2% yoy and the operating result by 59.2%. The performance in civil businesses finally recovered after H1 being severely impacted by cyberattacks. The orderbook reached an all-time high of €36.4bn and the management has re-iterated the FY23 guidance on the back of the good business development.
Rheinmetall published H1 results in line with the consensus. Q2 sales rose by 6% yoy and the operating result was flat with the performance driven by the military business, partially offset by weaker civilian business which was impacted by higher input costs and additional business recovery costs following the cyber-attack (~€10m) on civil IT systems in April. The orderbook reached an all-time high level of €30bn and the management has re-iterated the FY23 guidance on the back of good business development.
Rheinmetall published weaker than expected Q1 results. Sales were 5% above consensus, but operating income dropped by 20% to €73m, missing the consensus by 10% due to a lower contribution from the Chinese JV and other associates, as well as due to staff payments to compensate for inflation. Operating earnings excluding these at-equity results improved by 12.6%. The company re-iterated its FY23 despite a weak Q1 because profitability is expected to be back-end loaded (>2/3rds of the operating result expected in H2).
Rheinmetall has delivered a strong set of FY22 results, in line with the consensus. The company also published a very conservative guidance for FY23. After the conference call it seemed clear that this guidance is just a safety net to ensure that the company does not miss the management’s targets and we thus expect multiple positive revisions over the course of the year. Following this release we will upgrade our estimates, resulting in a positive revision to the target price.
While the FY23 guidance only appeared to meet market expectations at first glance, both mix (VS) and a multi-year opportunity in ammunition restocking call for double-digit upgrades to consensus EBITA 23-26e. Beyond exceptionally strong margins related to ring swap agreements in 2023/24e, RHM is due to become the global leader in artillery ammunition upon the consolidation of Expal in H2, which should safeguard margins of 14% as of next year, thus providing upside risk to the 13% mid-term target and consensus alike (FY25e: 13.6%). Our TP moves to EUR 300, we reiterate O/P. Key takeaways from the call - commentary suggests risk is clearly leaning to the upside We continue to struggle with today''s share price movement, not least as the conference call clearly indicated that FY23 guidance is way too prudent. The spill-over related to the ring swap agreements would bridge guided EBIT of EUR 890-950m alone, which should be complemented by decent profits for the remaining sales increase amounting to EUR 0.6-0.8bn. Together with a record order pipeline beyond what remains a EUR 15bn backlog in Defence and more ring swaps coming up, we have a hard time not to believe that consensus EBIT will move up by 10% in the coming months. Model changes - 10% uplift of our adj. EBITA 23-26e puts us 10% above consensus We apply more optimistic assumptions on mix at VS, mainly related to the ring swap contracts, which should see sales of EUR ~0.4bn in FY23 vs. EUR 50m in FY22 and faster (mainly) top-line growth at WA, driving our 10% uplift in adj. EBITA 23-26e. We also reflect the convertible bond, which, however, does not materially impact our PandL estimates. Yet we reflect the delta between the market and face value like other liabilities in the EV and reflect the 7% dilution in our DCF share count. Reiterate Outperform with new EUR 300 TP - the way is up! We continue to consider risk-reward attractive thanks to further improved visibility and the restocking...
We reiterate our Outperform rating for Rheinmetall with a new EUR 255 TP based on: 1) continued positive earnings momentum - both organically and via the consolidation of Expal - that is not captured in consensus (our adj. EBITA 2023-25e is 5% ahead), 2) a 15% discount compared to European defence peers despite ~2x higher EPS CAGR (BNPPE 2022-25e: 24%), and 3) a likely favourable order cycle in the coming months with a potential DAX inclusion the icing on the cake. Another deja-vu with FY22 prelims - we opt for margins over sales growth RHM pre-released lower than expected (and guided) organic sales growth of ~10% (target: ~15%) due to postponed call-offs, which was offset by an EBIT margin of ''at least 11.5%'' (target: 11%) implying a minimum 8% beat in Q4. While RHM did not provide any further colour on the performance by segments, we believe that Defence should have printed a strong quarter with the respective Q4 margin in the very high teens, reaching around 20% in the quarter (Q421: 18.0%). Expal and strong underlying Defence profitability drive our 16% uplift in adj. EBITA 24/25e Beyond stronger than expected underlying Defence margins in FY22, which we expect to further rise on the back of an improving mix in FY23 and outer years (superior growth in WA, tailwinds from ring swap agreements), we have reflected the announced Expal acquisition (Expal - almost too good to be true) in our estimates as we expect the deal to be approved without any remedies. As a result, we lift our adj. EBITA 2023e by 9% (assuming first time consolidation in H223) and by 16% in 2024/25e. New EUR 255 TP, reiterate O/P on visibility, earnings upgrades and attractive valuation Even after a 120% rally in the share price in 2022, we consider the equity story attractive given potential upside risk to consensus and attractive valuation. The stock is only trading about in line with the long-term average one-year forward P/E multiple despite a structural and...
Rheinmetall has hosted an impressive CMD with strong long-term prospects. It has now finally disposed of its Piston unit and can focus on its core Defense activities and some niche EV applications. NATO budgets are still ramping up and ammunition has become a scarce commodity in the current war. Rheinmetall has decided to grow externally to accelerate the ramp up of production, which should enable it to benefit fully from the strong current momentum.
Business fit between Expal and RHM looks compelling given its complementary nature RHM has announced it will acquire Spanish ammunition maker Expal Systems for an EV of EUR 1.2bn from Maxam, owned by US investor Rhone Capital, which appears to want to focus on the energy materials business for civil applications instead. Expal''s product offering is complementary: besides medium calibres, this especially applies to the strongly growing artillery and mortar markets, with combined capacity set to grow by 3.5x and 3x respectively thanks to Expal (based on the provided information on the call and slide deck). We understand that the deal should help to reduce dependence on external suppliers, and that Expal''s products have been deployed in platforms that have not been penetrated by RHM, thus limiting the risk of potential antitrust remedies, in our view. Terms look equally attractive given 12x EV/EBIT 22/23e might slide to 6x in the mid-term Expal is expected to generate sales of EUR 400m in FY 2022/23e (ends: 31/8) backed by an order book of EUR 520m and which should rise to EUR 600m by year-end. In 22/23e, EBIT margin should reach ~25% and EBITDA ~30% with EPS accretion to the tune of 10-15% expected as of year 1. Margins are said to have been at similarly high levels in prior years, not least due to a high degree of automation, which looks supported by sales/FTE of EUR 500k at Expal vs. EUR 250k for RHM''s WA segment. The agreed EV thus puts the asset at 3x EV/sales, 10x EV/EBITDA, and 12x EV/EBIT 2022/23e dropping to 1.5x / 5.0x / 6.0x based on potential sales of EUR 800m in the mid-term, even without assuming any further margin improvement that should come along with a doubling in sales. No equity planned for now, political support and upside risk at WA the icing on the cake While financing conditions are still subject to negotiation, the CFO hinted at new debt of EUR 1.1bn to finance the deal with NDT/EBITDA seen at 1x post the deal,...
Q322 was a rather light quarter in almost every aspect, yet FY22 guidance was reiterated Defence orders at EUR 0.7bn were below expectations for a b:b of 0.8x (LTM: 1.0x) and driven by weakness in VS and WA, while ES was strong (e.g. combat helmets for German Army). Adj. EBIT of EUR 117m was 4% short of consensus on a lower print in the Civil Business - SA suffered from a lack of pass-through clauses - while adj. EBIT at Defence was in line. FCF was negative again at EUR (47)m (9M: EUR (0.7)bn) due to EUR 139m NWC build-up in anticipation of a strong Q4. While order targets for 2023/24 were retracted, sales/adj. EBIT guidance for FY22 was reiterated, i.e. organic growth of ~15% (9M: ~3%) for implied 30% growth in Q4, an adj. EBIT margin of 11% (LTM Q3: 10.4%) and the FCF target of 3-5% of sales implying a EUR 0.9bn cash inflow in Q4. An overall comforting message on the conference call alleviating prior concerns The conference call revealed that 1) the order pipeline remains well filled both at home and abroad with the former expected to start unfolding in Q4 as implied in a EUR 3bn indication for orders in the quarter, while the CFO''s tone on the Australian Land 400 tender was surprisingly positive, whereas the market seems to have given up on the order; 2) commentary on mix behind the envisaged EUR 0.6bn y/y sales uplift at Defence suggests an almost 40% contribution by WA in Q4 supporting FY22 guidance; 3) FCF in Q4 should benefit from the seasonal EBIT uplift, a EUR 0.4bn inventory decline and prepayments on new orders; 4) 2023 trajectory might suggests further improvements, especially at WA and SA. Minor model adjustments following Q3 release, EBIT 23/24e is marginally below consensus We make only minor changes mainly reflecting a slightly more prudent stance on sales growth in the Defence operations in FY23e driving a 3% cut to our prior EBIT forecast, but barely any changes in outer years. Our new EBIT 2023/24e is marginally...
Rheinmetall delivered results spot on guidance. The sales and operating results were bang in line with the consensus, which comes as positive news given the push-back on German military orders and the Australian jumbo contract. The guidance was reiterated, suggesting that the Q4 will be massive as last-minute orders will empty the high inventories.
RHM shares collapsed on Friday following a 20% cut to its former order intake guidance for FY22, while other headline figures were widely in line. Even when consider the typical bullish tone in communication by mgmt, we believe the new guide as far more substantiated than before, and thus we upgrade RHM to Outperform from Neutral. We believe expectation has been reset (Our 22-24e EBIT is only 4% below consensus), while the risk reward looks compelling after the recent sell-off, which led to 11x/9x EV/EBIT 22/23e. We await further clarity with the CMD on 15/16 Sept. Commentary in the call points to improved robustness of new guidance framework Looking through the announced cut to expected FY22 orders, the conference call reassured us that the revised outlook is based on more substantiated discussions and not a risk-weighted pipeline. What is more, the opportunities beyond the EUR 15bn backlog at Defence (vs. guided sales of EUR ~4.5bn/5.5bn in 2022/23e) remain substantial, especially in the VS segment, which is using an ever rising share of solutions from the ES and WA divisions, suggesting higher value creation and thus higher margin. Besides, the prepayment profile of its German lead customer is set to improve, leaving sluggish progress around the envisaged portfolio changes in the Civil Business as the only negative. Solid Q2, fine-tuned EBIT 2022-24e signals limited downside risk to consensus Beyond temporarily soft orders, both Q2 EBIT (the 3% miss was driven by Covid-19 lockdowns in China) and FCF look solid, the latter on good NWC control. We make minor changes to EBIT 2022/23e (lower volume is widely offset by better margins), but reflect improved defence visibility thereafter for a ~5% uplift as of 2024e. Our new adj. EBIT 2023/24e sits only 4% below consensus, indicating limited downside risk from current level. Upgrade to OP (new TP EUR 212) on high visibility and fundamental appeal While the ~20% cut to the FY22 defence order...
Rheinmetall has posted results globally in line with expectations. It has already warned that its FY22 sales guidance would be at the lower end of the range, as Auto is facing larger than expected headwinds. The real negative news comes from the postoned German €35bn contracts, which pushes forward the expected order intake and associated sales. Losing the bid in Slovakia and Czech Republic did not help the current order intake.
Q1 results surprised positively in execution and orders, but negatively for FCF RHM released overall decent results regarding execution with headline figures for adj. EBIT falling 3% above consensus, with results driven by both the defence operations (5% ahead despite a 3% miss on revenue thanks to a favourable mix) and the Civil Business (6% above) alike. What is more, orders also surprised positively, not least as VS benefitted from better-than-expected orders for MIVs. To pour some water into the wine, FCF was significantly negative at EUR(471)m in the quarter on the back of a substantial NWC build-up by EUR 429m, though against low comparisons. FY22 guidance narrowed to earlier upside case, which is where consensus has settled though RHM skipped the earlier base case target of 8-10% sales growth at an adj. EBIT margin of 10-11% (FY21: 10.5%), which was replaced by the former upside case, i.e., 15-20% top-line growth and a margin of 11% vs. pre-Q1 consensus looking at 17% sales growth and an 11.2% margin. Based on a further swollen order pipeline (mainly due to the German budget expansion), RHM now also sees 15-25% sales growth in FY23 (pre-Q1 consensus: 16%). Yet commentary on margins and the mix by segments does not suggest any material changes at this juncture. Higher confidence in German defence business drives 3% EBIT uplift in 2022-24e Management expects that the EUR100bn special fund in Germany will be approved by Parliament before the summer break with first sizable orders (pipeline 2022/23e: EUR6-8bn / 7-9bn) expected to come through shortly thereafter. In light of the improved outlook for Germany in particular, we lift our defence/group adj. EBIT 2022-24e by 5%/3%, putting us slightly above consensus. Maintain Neutral rating with a new TP of EUR200 - risk-reward in balance Based on our new forecasts, the improved visibility in Germany and the gradual reassessment of prior ESG concerns for the defence sector overall, we...
Rheinmetall has published robust results, though globally anticipated by the market. The strong growth in Weapon & Ammuniton has resulted in a better product mix and higher margins. The order backlog of its Defence activities have increased healthily, as governments are progressively increasing their spending. Rheinmetall is still waiting for a firm order by the Bundeswehr to invest in extra capacity and start its promised revenue expansion. It has given more visibility on sales heading into FY23, which were impressive.
Final FY21 results in line with pre-release, both orders and FCF surprising positively RHM confirmed Q4 headline figures for both sales and adj. EBIT, which were 3% below/ 8% above consensus at the time of the pre-release on 11 February. By segment, VS drove the beat on decent operating leverage, while positive mix at WA resulted in a record margin of 27% in Q4 and of 18% in FY21 (+240bp y/y). ES and the Civil Business were broadly in line with expectations. Despite the EUR0.9bn ammunition order from Hungary slipping into Q1, Q4 orders marked a positive surprise at EUR1.4bn (b:b FY21: 1.3x), pushing the order book to EUR13.9bn at YE21. What is more, FCF rose to EUR419m (7.4% of sales), not least as NWC remained under good control (inventory driven). Base case guidance for FY22 in line, upside scenario implies ~10% upside risk to consensus Guidance for FY22 looks at 8-10% sales growth at an adj. EBIT margin of 10-11% (FY21: 10.5%), which, however, does not include ''possible impacts from Ukraine crisis''. The upside case looks at incremental sales of EUR0.4-0.5bn (15-20% top-line growth for the group) and a margin of 11%, and is based on additional short-term orders of the Bundeswehr as part of the announced budget expansion. As 50% is related to ammunition according to the CEO, this implies ~10% upside risk to consensus at the mid-point, which should spill over and accelerate into 2023 and beyond. Higher volume and better mix drive our new adj. EBIT 2023/24e 21%/23% above consensus Following the Cabinet''s approval yesterday, management is highly confident that the EUR100bn special fund will also be approved by Parliament; some orders have already been awarded. In light of the better than earlier perceived mix and assuming slightly higher volumes (raised by EUR0.5bn by 2025), we lift our adj. EBIT 2023/24e by 3%/7%, now sitting 21%/23% above consensus. Reiterate Neutral with a new TP of EUR170 - risk-reward in balance We value both...
Rheinmetall finished the end of the year strongly. The financial figures were heading in the right direction even before the conflict started as announcements on increasing military budgets had been made. The outlook has never been brighter for the German defence company, and we believe the short-term results will be boosted by a strong performance in Weapon & Ammunition and its high/fast capacity increase potential.
We had previously discussed that, through its exposure to Eastern European countries and its strong Defence portfolio, Rheinmetall was well set to perform extraordinarily well. The recent news of the German government doubling its defence budget should accelerate Rheinmetall’s growth and confirms the positive momentum of the stock.
Following Germany''s ~EUR25bn p.a. defence budget expansion as declared by Chancellor Scholz yesterday in his ''new era'' speech to the Bundestag, we lift our EBIT 2022/23e by 4%/15% reflecting a ~10% share of wallet related to procurement historically. Furthermore, the more Gemany''s new stance on defence might impact the EU''s view on the taxonomy debate. Our TP moves to EUR152 implying 12x P/E 2023e, yet we remain Neutral after today''s share price spike. Escalation in Ukraine conflict sparks defence spend increase to 2% of GDP The German Chancellor stated yesterday that ''as of today and year after year more than 2% of GDP is going to be invested in defence [...] to protect our liberty and democracy''. This implies a budget increase from EUR 50bn to EUR 75bn, for which a new fund worth EUR 100bn is planned. We lift our EBIT 2022/23e by 4%/15%, now sitting 10%/23% above consensus 35-40% of RHM''s defence sales are from Germany. While details of the budget hike are still pending, we assume a ~40% procurement quota (this might be too low, but domain-wise air might benefit more strongly) at a 10% share of wallet for RHM. This yields incremental EBIT of EUR 28m/110m in 2020/23, with our new adj. EBIT of EUR699m and EUR862m in those years. ESG discussion might be impacted as well RHM''s one-year forward P/E derated from historically 14x to 10x on the back of rising ESG concerns. Germany''s more constructive view on defence might impact the EU''s taxonomy debate, to the benefit of Rheinmetall, which has rallied ~60% year-to-date including today. Maintain Neutral - EUR152 TP reflects stronger fundamentals and lower ESG discount The changed (geo)political framework has not only prompted us to revise up our estimates, resulting in a 16% adj. EPS CAGR 2022-24e (vs 11% before), but also in a reduction of the ESG discount for Defence to now 10% (vs 25%). Our TP moves to EUR152, which implies 12x P/E 2023e (vs. 10x before). However, after today''s ~30%...
With double-digit sales and EBIT growth supported by a record order backlog and defence budgets in key markets still on the rise, valuation looks undemanding at 9x P/E 2023e. However, the taxonomy debate has started to weigh, and is expected to gain in importance, not only in the EU. Against this backdrop a rerating looks unlikely. We downgrade to Neutral with a new EUR110 TP. The business fundamentals look compelling ... At first glance RHM offers a compelling investment case based on a 1) a record order backlog of EUR14bn at Defence (~4x FY21e sales); 2) the Civil Business'' strong exposure to hybrids and PHEVs that could stand for ~2/3 of divisional sales by FY25e (FY21e: ~1/3), 3) corporate action potential beyond the still pending Pistons exit, and 4) potential higher cash returns to shareholders. ... which is not yet fully reflected in consensus Our updated model points to sales and adj. EBIT CAGR 2021-24e of 10%/12% with our 2022/23e adj. EBIT sitting 6%/8% above VA consensus. We expect consensus to move upwards over the next few weeks. FY21 results are due on 17 March, but the group already reported preliminary FY21/Q421 adj. EBIT 4%/8% ahead of expectations on strict cost control and favourable mix. Rising ESG concerns have driven a ~25% derating since Q4 2020 Defence companies with a high exposure to Europe have derated 20%+ since Q4 20 on rising ESG concerns closely linked to the taxonomy debate. RHM''s 12M forward PE suffered a ~25% contraction to c10x for FY22e from c14x historically. In this regard, its Weapon and Ammunition segment contributes ~20%/30% to group sales and EBIT. Downgrade to Neutral - our new EUR110 TP implies a 25% ESG discount for Defence Our 11% adj. EPS CAGR 2022-24e is broadly in line with defence peers. While the debate around the sector''s classification as socially harmful is ongoing we think that the ESG discount is unlikely to disappear. Our revised EUR110 TP (vs EUR130) implies 10x 2023e P/E. With a...
Rheinmetall published an encouraging set of results, with slightly disappointing sales but better-than-expected margins. Semiconductor and other raw material shortages impacted Rheinmetall this quarter, a situation which is expected to last through at least Q4. The Piston business continues to await disposal.
Rheinmetall published a record H1 reported EBIT thanks to cost savings that were implemented in FY20 that are now paying off. The Vehicle Systems division announced a record level of backlog at €10.5bn, boosted by significant contracts in Q2. Guidance has been confirmed for FY21, but still no news on Pistons.
Rheinmetall published results above expectations in sales and margins, confirming a good start to the year. The disposal of its Piston unit will give fresh impetus to its operating margins in the mid-term. Uncertainties could arise from the German elections and the semiconductor shortage, which it is starting to notice in its Automotive sector.
2021 guidance implies an up to 9% beat to consensus; we expect slightly more The top end of the 2021 guidance range (6-9% sales growth, 8-9% EBIT margin) would imply 9% upside to consensus. Given the usual signs that management remains cautious and aims to over-deliver, we are happy to remain slightly above the 9% margin level. Given the extremely solid Q4 performance (13.4% EBIT margin), despite a EUR6m write-down in Auto and lack of short-timing support, we see our 9.3% margin ambition for 2021 as eminently achievable. Q1 results (6 May) should confirm this potential for improvement in margins in both divisions. MandA and dividend still preferred over buybacks 2020 FCF was strong at EUR216m (cons. EUR132m), pushing Rheinmetall into a net cash position. MandA appears looming, with the CEO pointing to two potential acquisitions, to reinforce the Auto and Defence electronics businesses. However, these may not fully optimise the balance sheet, post the Pistons disposal (signing expected in Q3). As already announced, the dividend policy is under review, to upgrade to 40% payout (vs. 30-35%), but share buybacks appear not to be considered for now. While not surprising, we believe this hinders the group''s re-rating potential. ESG concerns being addressed but pressure may remain Clearly ESG has weighed on Rheinmetall''s valuation, but the group is committed to improve transparency. Its ambition to join the UN Global Compact should be a key building block in this, while improved communication on its business should help improve ESG ratings. Over the short-term, however, some pressure may remain, as new buyers remain scarce. Estimates largely unchanged, Outperform reiterated with c. 50% upside We leave our estimates broadly unchanged, with slightly weaker sales in 2021, largely offset by slightly stronger EBIT margin. EPS is cut by c. 4% over 2021-23, due to higher minorities than expected. Our SOTP methodology is unchanged, as is our EUR130...
Rheinmetall held an investor update call on Thursday, 4 February, on which it provided preliminary information regarding its FY20 earning as well as the key strategic objectives towards 2025.
Solid message on margins, sales growth in Automotive Rheinmetall''s 2025 outlook may on first glance appear broadly in line with expectations (EUR8.5bn of sales and 10% EBIT margin). However, this comes post the Piston disposals, implying a c. EUR500-700m sales beat to consensus in Automotive, as the margin target is to be understood as a minimum threshold for each business. While several areas already exceed this target, notably in Defence, they are not expected to experience margin pressure going forward, hence group margin should stand above. With the group''s 2-year time frame to review the business and potentially dispose of those failing to reach this profitability target, we believe that by 2023, the group should already be at a 10% margin, implying a 100bps beat on consensus. While a 2021 outlook was lacking in this presentation, we expect this to come with FY20 results on 18 March. Cash returns for now are only in the form of dividends Given the group''s de-levered situation, the benefit of further cash proceeds thanks to the planned Piston disposal (assumed at EUR200m in our model) and solid FCF generation (3-5% of sales targeted), cash returns would provide a significant boost to the equity story. At this stage, management rules out share buybacks, but is considering revising its payout policy to c. 40% (vs. the current 30-35% range). We also expect confirmation of this new policy with FY20 results. MandA could also be an attractive cash use but as noted in the call, finding the right target remains a challenge. EPS estimates raised by c. 6% for 2021 onwards, TP raised to EUR130 from EUR120 We have adjusted our estimates to reflect FY20 preliminary results, resulting in a 3% adj. EPS increase, stronger sales and margin recovery in Automotive along with the Piston disposal (reported in the HQ line in 2021 and sold in 2022). Our EPS rises 6% in subsequent years. Our TP is raised to EUR130, reflecting these higher earnings along with...
Very solid Q3 performance met with lack of investor appetite Rheinmetall delivered solid Q3 results, outperforming expectations on both its Automotive (higher sales, solid cost control) and Defence businesses (good execution and mix). FY guidance also suggested upside to consensus, and seems to come with the typical caution from management, on Automotive Q4 sales, HQ line and potentially even Defence margin. 2021 outlook will be disclosed in March but we expect a high-single digit increase in consensus, largely driven by faster margin recovery in Automotive. Still, the stock was weak, likely due to a lack of appetite on ESG concerns. What could re-spark investor interest? We believe ESG concerns are somewhat overdone given a 20-25% discount to defence peers such as BAE Systems or Thales, which have direct exposure to controversial weapons. However, this means incremental buyers for the shares are challenging to find as some funds take a strict exclusion view. In order to close the valuation gap, Rheinmetall, which has a solid balance sheet, could consider share buybacks; however, management tends to favour dividend, and may delay any exceptional shareholder returns to protect its MandA firepower over the near term. Changing the Automotive profile towards higher value products The Automotive division is often seen as commoditized, which we argue is largely due to its pistons business. With the now-public decision to divest this activity by H2-21, this could also represent a trigger for improved investor perception, due to its relative impact on Automotive margins and the resulting lower weight of ICE vehicles in the division sales. Sales resilience over Q2-Q3 vs. LV production despite weak pistons also bodes well for the growth potential post divestment. Solid fundamentals should not be fully discounted, maintain EUR95 TP and Outperform We acknowledge that ESG pressure may prevent the defence sector from re-rating, but see no reason...
