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A rising tide doesn’t lift all boats. The European defence sector has risen roughly 2.5-fold since Russia invaded three years ago, buoyed by wars and expanded defence budgets. Left behind in the slipstream: a motley crew of smaller contractors.
These include three British suppliers: Qinetiq, Chemring and Avon Technologies. But this is about more than the curse of the London stock market. Instead, the trio are being held back by earnings, geographic exposure and legacy baggage.
Qinetiq, which provides services such as testing and evaluation, most recently downgraded full-year guidance, cutting revenue growth and underlying margins. All in, the revisions imply a 15 per cent hit to ebit.
Part of this is pinned on the loss of short-term contracts, which can go Awol when new governments take up the reins — as happened in the US and UK. Elsewhere, legacy contracts taken on at lower margins and restructuring costs eat into the bottom line.
Most of the former emanated from the US, where Qinetiq’s exposure is morphing into a vulnerability. As an industry heavily reliant on government custom, defence service contractors are bang in the sights of the Department of Government Efficiency’s wrecking ball.
Qinetiq’s US rivals — tagged “Beltway Bandits” for their Washington DC clientele — went into reverse within days of the US election. CACI, Leidos, Booz Allen Hamilton and Science Applications International Corp are down between 25 and 45 per cent or so since November 11.
Qinetiq, demerged from the UK Ministry of Defence in 2001, derives around a fifth of its revenues from the US; Chemring a third. At Avon, which makes protective gear, such as gas masks and helmets, it is as much as 70 per cent, if you include products bought by first responders, police and the like.
Buybacks, under way at Qinetiq and Chemring, provide a sop to share prices but send a jarring signal: at a time of bountiful demand, it would seem more logical to invest.
That raises questions over some of their bolder expectations. Chemring, which supplies materials and components for missile systems as well as explosives, is targeting about £1bn of revenues by 2030, double last year’s £510.4mn. The implied compound annual growth of almost 12 per cent trumps both last year and the previous five years’ run rate.
Defence laggards are, at least cheap. Multiple re-ratings make industry stars such as Germany’s Rheinmetall look toppy — at 45 times forward earnings it is more than double Qinetiq and Chemring. Serial disappointments set a low benchmark.
That gives smaller contractors the chance to catch up — if they deliver on their promises. Visible Alpha consensus forecasts see ebitda growth of 16.5 per cent for Chemring in 2026 and 15 per cent for Avon. In a sector defined by long lead times, patience can pay off.