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The way forward: From rearmament to profitable growth
The Finserve Global Defence & Security Fund declined by 5.2 percent in October. The month prolonged a weak period for the fund and coincided with a weaker market sentiment for the defense sector. Several U.S. defense companies posted positive returns following strong reports, but we also saw declines in defense companies in several geographic regions, as well as subcontractors to the defense industry. The month was also marked by increased volatility and concerns within the technology sector, which also affected the cybersecurity and space sectors.
The weak stock market performance in the defense sector contrasts with an increasingly strained security environment, increased defense spending, and the good performance of the companies reflected in the latest quarterly reports. We see seasonal effects in the quarterly reports, with Q4 generally being strongest for defense companies. The published reports for Q3 so far also show continued strong demand among most portfolio companies. Kongsberg and MilDef combine higher sales with improved margins, while RTX and Lockheed Martin report large order intake. Growing order backlog and investments in production capacity support continued growth, although the development differs between companies.
We summarize our view on the Q3 reports in our webinar on November 18th so Sign up now.
The management weighs these long-term opportunities against the companies’ valuations and the risks in the portfolio. This means both testing the expectations already embedded in share prices and maintaining exposure to companies with the potential to create shareholder value over time. Funded orders, production capacity, and the ability to generate increased profits and free cash flow are central to both the selection of companies and the size of positions.
Long-term defense needs and increased production capacity
The security situation remains tense in several parts of the world. During October, diplomatic initiatives regarding Ukraine and Iran ran parallel to continued military threats and unresolved conflicts. Tensions surrounding Taiwan and the Philippines are also contributing to the uncertainty in the Pacific region.
The need to replenish stockpiles and strengthen defense capabilities points to a demand for defense equipment that extends over many years into the future, even if diplomacy leads to progress. At the same time, U.S. commitments in several regions increase the importance of more capable allies in Europe and Asia. This is likely also leading to higher demands on the allies.
Next, both emphasize the greater European responsibility for conventional defense and the need for expanded defense production on both sides of the Atlantic. For regional suppliers, the development may mean more business opportunities, but production capacity and supply chains limit how quickly demand can be translated into deliveries.i
Defense gets more space in European budgets even when state finances are under pressure. In France’s budget proposal, defense spending is proposed to increase by 6.4 billion euros in 2027, in parallel with extensive savings and tax increases. Negotiations remain politically difficult.ii
In Germany’s September budget proposal, material procurement is planned at over 60 billion euros in 2027, including the Bundeswehr’s special fund, compared to around 45 billion in 2026. For industry, both the size of the appropriations and the distribution between different expenditures are significant. Concrete purchasing plans provide a clearer picture of the potential demand from companies.iii
The Finerves sector report highlights that the acquisition of equipment is growing faster than the defense budgets as a whole, with an increasing share going towards equipment acquisition. According to the report, the acquisition of equipment in European NATO countries could grow by about 16 percent per year from 2025 to 2030, compared to about 8 percent for the total defense spending. The report also highlights projections of approximately 12 percent annual sales growth and 16 percent EBITA growth for European defense companies by 2030. [3]
Read the full sector report here
In the Pacific region as well, the defense industrial base is being strengthened. Japan and the United States are deepening cooperation to produce materiel more quickly and on a larger scale, including through the joint production of robots. Japan is also working to revise its three strategic security and defense documents before the end of the year. This development could give Asian suppliers greater opportunities to meet both national needs and the demands of allies. iv
Stock price development during October
| Largest increase | Development | The biggest decline | Development |
| OHB SE | +26 % | Hanwha Aerospace | −31 % |
| SAIC | +19 % | Carpenter Technology Corp. | −27 % |
| Huntington Ingalls Industries | +19 % | Satrec Initiative Co. | −27 % |
| L3Harris Technologies | +17 % | Electro Optic Systems Holdings | −24 % |
| Northrop Grumman | +15 % | Fortinet Inc. | −24 % |
The percentages refer to the development for each share during October.
Company-specific news
The attack on King Khalid Airport in Riyadh on October 10 shows how regional conflicts can directly target civilian infrastructure. According to preliminary reports, drones were used before a combination of cruise missiles and ballistic missiles. The attack thus highlights both the need for early detection and the ability to handle multiple threats simultaneously. The need for more cohesive protection is also evident in Kuwait’s efforts to establish a nationwide drone surveillance system. Electro Optic Systems On October 9, it announced a contract worth 370 million pounds, approximately 700 million Australian dollars, for a nationwide drone defense system in Kuwait. The subsidiary MARSS will connect sensors, control systems, and combat systems through the NiDAR management platform. The deal illustrates how the demand extends to entire systems for the protection of critical infrastructure. v
Saab: The Ukraine order boosts the order backlog
Saab's order intake in the third quarter was more than three times the sales figure, and the Gripen order to Ukraine worth 24.6 billion kronor accounted for a large part of it. The order backlog now amounts to 364 billion kronor, compared with 275 billion at the beginning of the year. Cash flow is more uneven than the results. Free cash flow was negative in both the first and second quarters, 301 and 293 million kronor, before turning to 5,647 million in the third quarter. Saab itself warns of large fluctuations between quarters.
Kongsberg Group: Record-high order backlog and strong growth
Kongsberg’s revenue rose by 50 percent to 11.3 billion Norwegian kroner in the third quarter. Operating profit increased by 66 percent to 1.9 billion with a margin of 16.4 percent compared to 14.8 percent the previous year. Order intake more than doubled to 23.3 billion kroner, among other things through Belgium’s NASAMS order of 9.8 billion kroner. The order backlog reached a record high of 174 billion kroner.
Defence Systems' margin rose to 20.6 percent, partly thanks to positive one-off effects. In Missiles & Aerostructures, the margin fell to 11.6 percent from 16.5 percent, driven down by the ramp-up in production within Zone 5.
Operating cash flow amounted to SEK 4.1 billion. The company plans to continue making high investments in 2027–2028 and aims to achieve a turnover of SEK 100 billion in 2029.
MilDef: Record quarter but negative free cash flow
MilDef reported its strongest quarter to date. Net sales rose by 54 percent to 829 million kronor, entirely organically, and the adjusted EBITA margin reached 21.8 percent compared to 15.7 percent. Order bookings of 2,091 million kronor were approximately 2.5 times the turnover and are driven by, among other things, an extension of the framework agreement with the Bundeswehr, potentially worth approximately 527 million euros. Cash flow shows the effect of the expansion. Free cash flow was minus 112 million kronor as the company builds up inventory in anticipation of deliveries in the upcoming quarter and customer receivables increased with the volumes. For the nine-month period, cash flow is nevertheless positive, 55 million kronor.
GE Aerospace: the volume of services drives the company
GE Aerospace's order intake rose 49 percent to $19.0 billion. The growth came primarily from Commercial Engines & Services, where service orders increased 23 percent and equipment orders more than tripled. CEO Larry Culp pointed to a backlog of over $170 billion for commercial services. Adjusted operating income rose 30 percent, but free cash flow fell 14 percent to $2.0 billion. The company nevertheless raised its full-year forecast.
RTX: Strong growth supported by customs refunds
RTX reported double-digit growth on October 20 and raised its full-year forecast. Sales rose 11 percent to $25.0 billion, with organic growth of 12 percent. Adjusted earnings per share increased 33 percent to $2.26. Repayments of IEEPA duties contributed $0.25 per share, corresponding to nearly half of the earnings increase. Excluding this contribution, earnings per share also increased by approximately 18 percent.
Pratt & Whitney was burdened at the same time by a cost of $363 million related to a customer bankruptcy, which was excluded from the adjusted earnings. Free cash flow decreased 47 percent compared to the same quarter last year, to $2.1 billion. Despite the decline, RTX raised its full-year free cash flow forecast to $9.0–9.2 billion. The order backlog reached a record high of $340 billion.
CSG and MDA Space The two companies became closer when CSG announced on October 13 that the company had acquired a 9.5 percent stake in MDA Space. Possible future collaborations include European production facilities and joint acquisitions. [5] Also Rheinmetall During the month, there were increases in space-based surveillance. On October 6, the joint venture Rheinmetall ICEYE Space Solutions announced that the German Armed Forces have gained direct access to radar-tracking satellites allocated to the German Armed Forces under the SPOCK 1 program. At the same time, satellite production has begun in Neuss. Together with CSG’s investment in MDA Space, this shows how space technology is gaining a greater role in the operations of defense companies. we
Exosens: demand is growing faster than capacity
Demand for night vision imaging tubes still exceeds production capacity, and a faster capacity build-up in Europe is the reason why growth accelerated in the third quarter. The price is reflected in the margin. The adjusted gross margin fell to 48.6 percent in the quarter from 52.1 percent. The company also received its first delivery order from the U.S. military, for 1,600 BiNOD systems.
In our webinar on November 18, we will deepen the analysis of the reporting period and the long-term development in the defense sector. Sign up now.
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