Defence shares have risen in worth in recent times following Russia’s invasion of Ukraine, the battle in Gaza and, most not too long ago, US President Donald Trump’s declaration that Washington won’t come to assistance from Nato members whose defence spending is simply too low.
Trump’s view is that safety budgets needs to be not 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 corporations reminiscent of Rheinmetall, Thales, BAE Techniques, Leonardo and Saab have all risen in worth, climbing significantly steeply this yr.
Traders count on increased spending commitments to translate into new arms orders and upgrades. As contracts are signed, there could possibly be extra share worth momentum. However large, long-term contracts can carry price and obsolescence dangers; orders won’t materialise and lots of of those firms can be impacted by Trump’s tariffs. Nonetheless, traders have loads of choices, in each tier of the market, with various levels of publicity to the defence sector.
Apart from the extremely rated FTSE 100 brigade, which incorporates BAE, Babcock — which maintains Britain’s nuclear submarines — and Rolls-Royce, smaller gamers embody safety expertise and testing specialist Qinetiq, defence engineer Chemring (each within the FTSE 250), and on London’s junior market, defence expertise group Cohort, Filtronic and Concurrent, which provides companies and the army with tools and parts to allow programs to function seamlessly in probably the most inhospitable of environments.
Traders have to preserve a cool head when share costs get carried away on momentum and to concentrate to firms’ underlying strengths. However geopolitical tensions and better defence spending appear unlikely to fade quickly, that means these firms ought to have affordable development runways forward of them.
BUY: Concurrent Applied sciences (CNC)
Robust development could possibly be affected by tariff disruption, writes Arthur Sants.
Concurrent Applied sciences makes sturdy computer systems utilized in army planes and ships. These are small pc boards that may energy radar programs or communication gear and may endure excessive warmth or vibrations.
The current surge in defence spending has pushed robust development. Within the yr 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 so far with a “main” US defence contractor. This massive deal is about to contribute materially from 2027.
Nonetheless, the US tariffs and the overall hostile rhetoric from US President Donald Trump in direction of Europe are a priority. Final yr, 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 nations contributing 20 per cent. The current multibillion greenback spending plan from Germany ought to enhance development. Nonetheless, it’d come on the expense of US enterprise which may swap in direction of extra home suppliers.
Administration says buying and selling this yr has began properly and £100mn is a “significant future milestone”. This development can be accelerated in 2026 when income from the large contract win comes via. Concurrent trades on a ahead worth/earnings ratio of 25, which is dear, however given its development fee and steadiness sheet energy, it doesn’t look exorbitant. Tariffs can be an issue, however in the long term elevated defence spending can be a extra necessary macro issue. And its robust steadiness sheet will imply it’s braced for tough days forward.
BUY: AB Dynamics (ABDP)
The corporate is properly positioned on the tariff entrance in contrast with European opponents, writes Christopher Akers.
AB Dynamics bought off to a sturdy begin with its newest medium-term development 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 Goal-traded automotive testing firm’s divisions. Gross sales had been up 7 per cent at its largest unit, testing merchandise, because of development in driving robots and the September acquisition of German automotive energy electronics testing options enterprise Bolab Techniques.
The smaller testing providers and simulation items grew extra quickly. Testing providers delivered gross sales development of 21 per cent forward of latest US regulatory necessities, whereas gross sales within the simulation arm had been up 15 per cent on account of 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 had been clear.
AB Dynamics set out a medium-term development technique in November, with the intention of doubling income and tripling working revenue via natural development of 10 per cent a yr in core markets, and rising the working margin to twenty per cent.
The corporate generated 30 per cent of income in North America within the half, and so traders may really feel involved about tariffs. Nonetheless, chief govt James Routh argued that the direct influence from the introduced levies “is more likely 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 properly positioned in contrast with opponents reminiscent of 4 energetic 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 yr and an enchancment from £30.3mn final August.
AB Dynamics trades on 22 occasions ahead earnings for 2026. In our view, that can finally show engaging if it will probably 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 development, however the catalogue retailers arm struggles, writes Michael Fahy.
Perhaps it was the Easter weekend approaching, however as chief govt Simon Roberts offered 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 bettering buyer perceptions round high quality and worth, with extra prospects selecting to do their fundamental weekly store on the retailer, Roberts mentioned.
Gross sales grew by 4.1 per cent which, when accompanied by £350mn of price enhancements, translated into underlying working revenue development 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.
Nonetheless, when the weaker efficiency of the Argos enterprise — whose gross sales fell by 2.7 per cent and earnings just about collapsed — is factored in, the group’s retail working revenue development was bang according to friends.
Though Argos improved sequentially over the course of final yr to file gross sales development of 1.9 per cent within the remaining quarter, it needed to shift loads of inventory at a reduction to take action and administration doesn’t count on a lot enchancment on this enterprise this yr. 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 reducing our costs” over the previous 4 years Sainsbury’s is in a good place to defend share beneficial properties, Roberts argued.
Competitors considerations pushed Sainsbury’s shares down by 8 per cent this yr, however the muted steerage meant home dealer Shore Capital minimize its earnings forecast by the same quantity. A dividend yield north of 5 per cent and the prospect of £450mn of additional returns via 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.