Defence shares have risen in worth lately following Russia’s invasion of Ukraine, the battle in Gaza and, most lately, US President Donald Trump’s declaration that Washington won’t come to the help of Nato members whose defence spending is simply too low.
Trump’s view is that safety budgets ought to be no less than 5 per cent of GDP. Within the face of those threats, the UK and the EU have dedicated to spending billions extra on weapons and their armed forces, and firms comparable to Rheinmetall, Thales, BAE Programs, Leonardo and Saab have all risen in worth, climbing significantly steeply this 12 months.
Buyers anticipate larger spending commitments to translate into new arms orders and upgrades. As contracts are signed, there might be extra share worth momentum. However massive, long-term contracts can carry value and obsolescence dangers; orders won’t materialise and plenty of of those corporations might be impacted by Trump’s tariffs. Nonetheless, buyers have loads of choices, in each tier of the market, with various levels of publicity to the defence sector.
Moreover the extremely rated FTSE 100 brigade, which incorporates BAE, Babcock — which maintains Britain’s nuclear submarines — and Rolls-Royce, smaller gamers embody safety know-how and testing specialist Qinetiq, defence engineer Chemring (each within the FTSE 250), and on London’s junior market, defence know-how group Cohort, Filtronic and Concurrent, which provides companies and the navy with gear and elements to allow techniques to function seamlessly in probably the most inhospitable of environments.
Buyers must maintain a cool head when share costs get carried away on momentum and to concentrate to corporations’ underlying strengths. However geopolitical tensions and better defence spending appear unlikely to fade quickly, that means these corporations ought to have cheap progress runways forward of them.
BUY: Concurrent Applied sciences (CNC)
Robust progress might be affected by tariff disruption, writes Arthur Sants.
Concurrent Applied sciences makes strong computer systems utilized in navy planes and ships. These are small laptop boards that may energy radar techniques or communication gear and may endure excessive warmth or vibrations.
The latest surge in defence spending has pushed robust progress. Within the 12 months to December, Concurrent’s income elevated by 27 per cent to £40.3mn whereas its money revenue (Ebitda) was up 30 per cent to £7.8mn.
It secured 22 design wins throughout all areas, this included 10 “main wins” in addition to its largest ever contract up to now with a “main” US defence contractor. This huge deal is ready to contribute materially from 2027.
Nevertheless, the US tariffs and the overall hostile rhetoric from US President Donald Trump in the direction of Europe are a priority. Final 12 months, the US made up 45 per cent of Concurrent’s income, with Germany making up 9 per cent and the UK 7 per cent, with different European international locations contributing 20 per cent. The latest multibillion greenback spending plan from Germany ought to enhance progress. Nevertheless, it’d come on the expense of US enterprise which might change in the direction of extra home suppliers.
Administration says buying and selling this 12 months has began nicely and £100mn is a “significant future milestone”. This progress might be accelerated in 2026 when income from the large contract win comes by. Concurrent trades on a ahead worth/earnings ratio of 25, which is dear, however given its progress fee and stability sheet energy, it doesn’t look exorbitant. Tariffs might be an issue, however in the long term elevated defence spending might be a extra essential macro issue. And its robust stability sheet will imply it’s braced for difficult days forward.
BUY: AB Dynamics (ABDP)
The corporate is nicely positioned on the tariff entrance in contrast with European opponents, writes Christopher Akers.
AB Dynamics obtained off to a strong begin with its newest medium-term progress plan as income rose by double digits and working revenue elevated by a fifth in its first half.
High-line progress was made throughout all three of the Intention-traded automotive testing firm’s divisions. Gross sales have been up 7 per cent at its largest unit, testing merchandise, due to progress in driving robots and the September acquisition of German automotive energy electronics testing options enterprise Bolab Programs.
The smaller testing companies and simulation items grew extra quickly. Testing companies delivered gross sales progress of 21 per cent forward of latest US regulatory necessities, whereas gross sales within the simulation arm have been up 15 per cent resulting from improved movement platform gross sales. The corporate additionally flagged two contract wins for the second half.
Adjusted working revenue was up 21 per cent and the margin improved by 160 foundation factors to 18.6 per cent. The gross margin uplift was even higher, shifting up 190 foundation factors to 60.2 per cent. Good points from provide chain enhancements and a brand new enterprise useful resource planning (ERP) system have been clear.
AB Dynamics set out a medium-term progress technique in November, with the purpose of doubling income and tripling working revenue by natural progress of 10 per cent a 12 months in core markets, and growing the working margin to twenty per cent.
The corporate generated 30 per cent of income in North America within the half, and so buyers may really feel involved about tariffs. Nevertheless, chief govt James Routh argued that the direct impression from the introduced levies “is prone to be restricted” and administration expects to ship annual adjusted working revenue according to analyst consensus of £22.4mn.
Panmure Liberum analyst Sanjay Vidyarthi identified that the corporate is comparatively nicely positioned in contrast with opponents comparable to 4 lively and VI-grade, which manufacture in Europe, given it sells merchandise to the US from the UK, which has a decrease 10 per cent tariff fee. Europe’s tariff fee is 20 per cent, albeit this was halved for 90 days as a part of President Donald Trump’s April 9 climbdown.
The order guide sat at £42.1mn at February 28, simply forward of the identical level final 12 months and an enchancment from £30.3mn final August.
AB Dynamics trades on 22 occasions ahead earnings for 2026. In our view, that may finally show enticing if it will possibly ship on medium-term hopes. We see potential for upgrades within the second half.
HOLD: J Sainsbury (SBRY)
The grocery store enterprise delivers robust revenue progress, however the catalogue retailers arm struggles, writes Michael Fahy.
Perhaps it was the Easter weekend approaching, however as chief govt Simon Roberts introduced J Sainsbury outcomes he sounded extra like he was delivering a sermon than an evaluation of its efficiency.
The retailer had “reinvigorated our ardour for meals”, he argued, discussing a enterprise that has been “remodeled”.
To be truthful, the numbers did level to one thing of a resurrection. Sainsbury’s share of the grocery market by quantity rose to 12.8 per cent, up from 12.2 per cent two years earlier. This has been helped by enhancing buyer perceptions round high quality and worth, with extra prospects selecting to do their most important weekly store on the retailer, Roberts mentioned.
Gross sales grew by 4.1 per cent which, when accompanied by £350mn of value enhancements, translated into underlying working revenue progress of greater than 15 per cent — greater than double the 7.2 per cent recorded throughout the sector. This boosted its return on capital by 70 foundation factors to 9 per cent.
Nevertheless, when the weaker efficiency of the Argos enterprise — whose gross sales fell by 2.7 per cent and earnings nearly collapsed — is factored in, the group’s retail working revenue progress was bang according to friends.
Though Argos improved sequentially over the course of final 12 months to document gross sales progress of 1.9 per cent within the last quarter, it needed to shift loads of inventory at a reduction to take action and administration doesn’t anticipate a lot enchancment on this enterprise this 12 months. Certainly, the group-wide outlook is for underlying working revenue to stay flat at round £1bn because it components within the prospect of a way more aggressive grocery market.
As but, there isn’t a lot proof of a worth warfare and after “investing £1bn in decreasing our costs” over the previous 4 years Sainsbury’s is in a good place to defend share beneficial properties, Roberts argued.
Competitors issues pushed Sainsbury’s shares down by 8 per cent this 12 months, however the muted steerage meant home dealer Shore Capital reduce its earnings forecast by an analogous quantity. A dividend yield north of 5 per cent and the prospect of £450mn of additional returns by buybacks and a particular dividend as soon as the sale of Sainsbury’s Financial institution completes are interesting, however with the shares pretty rated at 11.4 occasions forecast earnings we’re not but able to be transformed.
