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...
