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The UK market corner has its best year in at least 20 years, but investors won’t raise prices with even better news. A strategic review of the country’s defense requirements estimated that the government would need to spend an additional £68 billion to prepare for war. The reaction was warm. Local aerospace and defense stocks rose about 2% this week.
This implies skepticism that Westminster can, or will, find, the eye-opening funds the report has been seeking. This total is more than three times the size of the financial “black holes,” which the labor government says to have inherited from its predecessors. Additionally, this review outlines the need for drones, self-driving cars, AI, nuclear warheads, fighter jets and submarines, but politicians are not obligated to follow that advice.
However, UK defence stocks are generally relatively attractive bundles. Certainly, eight of the FTSE All-Share Index, led by BAE Systems, Rolls-Royce, Babcock and Chemring, won £53 billion (55%) in market capitalization this year. It is also true that most sectors have surpassed average ratings due to this year’s rally. BAE has traded at around 12 with 20x forecast revenue over the past 20 years.
However, the growth profile of UK defence stocks is brightening. Prime Minister Kiel may have avoided calling for a clear target this week. However, it is clear that European governments are actually spending more on defense, helping to provide long-term clarity in revenue as the projects are agreed. NATO will meet later this month, with members expected to commit to increasing spending to 3.5% of GDP, allowing them to move into related areas such as infrastructure and cybersecurity.
Meanwhile, even after the fierce accusations, British defense stocks continue to look relatively inexpensive compared to parts of Europe. Even putting aside German Rhinemetal, which has been filming stars thanks to a new 500 million euro government funding plan for revenues of 27-30 times this year.
Bae, Babcock, and Chemring are below 20. The expected revenue growth is a little lower than its European rivals, but defense contracts create a lumpy financial model at their best. The UK’s promises, or hopes, are far inferior to those of Germany. But they could pick up from here. Defense inventory is also required.
jennifer.hughes@ft.com
