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June 7th, 2022 | 13:23 CEST

Rheinmetall, Thyssen, Defense Metals, Airbus: Fighting the war with these blockbuster shares

  • Defense
  • armaments
  • RareEarths
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The German government has reaffirmed the need for a powerful army and anchored the 100 billion euro special fund in the constitution before the Whitsun recess. The reason why the Basic Law had to be used for this was supposedly due to the budget issue because the red and green members of the government, in particular, do not want the general budget to be diminished by defense spending. Now it is here again, the reversal of the "peace dividend"; for many years, Germany in particular was able to profit from the reduction in defense spending. NATO welcomes the German decisions and now sees Germany as a paying "full partner" again. This also finally puts to rest Trump's demand for Berlin to contribute more to NATO peacekeeping costs. Where are the opportunities for investors now?

time to read: 4 minutes | Author: André Will-Laudien
ISIN: DEFENSE METALS CORP. | CA2446331035 , THYSSENKRUPP AG O.N. | DE0007500001 , RHEINMETALL AG | DE0007030009 , AIRBUS | NL0000235190

Table of contents:

    Rheinmetall - Demand for defense technology should go through the roof

    Over the weekend, Spain reported the delivery of older "Leopard 2A4" tanks to Ukraine. These are probably mothballed tanks that first have to be prepared for deployment, wrote the newspaper "El Pais", citing information from the Defense Ministry in Madrid. According to the newspaper report, about 40 of 108 used Leopard tanks that Spain bought from Germany in 1995 could be made operational again. The ministry has yet to comment on the report.

    It certainly looks as if Krauss-Maffei Wegmann and Rheinmetall could be in for a whole flood of orders for modern defense technology. Rheinmetall has announced several new products for the Eurosatory international defense trade fair in Paris. What the products have in common is their focus on the digitalized battlefields of the future. Rheinmetall cites a new vehicle concept that will make its world premiere at Eurosatory as a highlight. The Düsseldorf-based technology group produces several combat vehicles, ammunition and technical equipment and is a systems supplier for airborne reconnaissance. In order to be able to process the upcoming orders, Rheinmetall has submitted a non-binding offer for a minority stake in the Italian Leonardo division OTO Melara. The hope is for a 49% stake in the range of EUR 200 million, which could be a bargain.

    The analyst firm Warburg Research still sees great growth potential for Rheinmetall in the medium term due to its extensive defense investments. The Hamburg-based firm estimates that the defence group can participate in special projects worth up to EUR 25 billion, with profits expected to rise by up to EUR 10 billion. Within ten years, munitions orders of another EUR 700 million per year could be received from Berlin. Therefore, the new Warburg recommendation is "buy" with a price target of EUR 240 after EUR 199. Rheinmetall is currently valued at EUR 9 billion on the stock market. Based on the new news, this seems to us to still be undervalued. The EUR 192 mark should now no longer be undershot in chart terms.

    Defense Metals - Rare earths from Wicheeda

    In times of crisis like now, the urgency in the supply of strategic metals becomes prominent again. Currently, China is threatening an export ban on rare earths; they are essential for modern technologies - from smartphones to wind turbines. China's three largest state-owned rare earth companies merged in December 2021 to form China Rare Earth Group. The Company is now the second-largest rare earth mining and refining group globally, producing nearly one-third of China's rare earth production and 60-70% of its heavy rare earth production. This should make it easier for Beijing to control the direction and pricing of rare earths and potentially limit exports to the West while meeting domestic demand.

    North American governments have made this deficit with China a top priority, meaning that any available and future resource will be highly valued. From this perspective, one of the few promising rare earth projects outside of China is emerging in British Columbia. Defense Metals, an exploration company based there, is focused on advancing the Wicheeda Rare Earth Project, which covers approximately 2,008 hectares. A preliminary economic assessment (PEA) was conducted in 2021, and it provided a solid after-tax discounted net present value of 8% of CAD 517 million. A significant advantage of the current REE project is the production of a saleable, high-grade flotation concentrate.

    The Acid Bake process is currently being tested for REE extraction. Lower operating costs are evident, and preliminary results show that the process is more efficient and provides greater than 95% recovery of neodymium and praseodymium from the flotation concentrate into a leach solution. This hydrometallurgical program, which began in December and includes the operation of a pilot plant, will be completed in the last quarter of 2022. The Company has just raised CAD 4.6 million (gross) through a private placement in order to finance it. The stage is thus set for Defense Metals (DEFN) shares to perform well. With 178.8 million shares, the current market value is just under CAD 45 million. The value is currently still close to the last capital measure, but the DEFN share should not be available there for long.

    Airbus versus Thyssen - Who gets more of the Bundeswehr pie?

    In 2020, the aerospace group Airbus made a turnover in the defense sector of around USD 12 billion. This revenue accounted for 21% of total sales in the period. Last year, Europe's largest aircraft manufacturer and defense contractor reported the highest profit in its history at nearly EUR 4.2 billion. In addition to more aircraft delivered, the results also reflect good performance by the helicopter and defense and space businesses.

    At thyssenkrupp AG, last year was still flat, closing with a net loss of EUR 19 million, and the dividend was cancelled. The Marine Systems segment accounted for only 6% of sales in the process but is well ahead in terms of order intake at around EUR 6.6 billion. Group sales are expected to grow by around 15% in 2021/22 and a significant profit is also expected again. The Group is currently undergoing restructuring in favor of a more GreenTech-oriented focus. The topic of hydrogen is receiving special attention, but the further development of electrolyzer technology will still consume a lot of money.

    Airbus management, meanwhile, is holding out the prospect of even better figures for the current year. Production is expected to increase by about 20%. A small unknown is the expected military spending from Berlin, as Airbus is involved in both Eurofighters and combat helicopters. Both stocks are exciting, Airbus is certainly the better positioned standard stock in terms of the balance sheet, but thyssenkrupp AG has the greater turnaround leverage with a market capitalization of only EUR 5.6 billion.

    In times of war, investors are once again turning their attention to defense stocks. They have all done well, but Rheinmetall and Airbus still receive positive votes from analysts. At thyssenkrupp, there is speculation of a turnaround, and at Defense Metals, there is a need to sit tight, as the project still needs a few months of realization time.

    Conflict of interest

    Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.

    In addition, Apaton Finance GmbH is active in the context of the preparation and publication of the reporting in paid contractual relationships.

    For this reason, there is a concrete conflict of interest.

    The above information on existing conflicts of interest applies to all types and forms of publication used by Apaton Finance GmbH for publications on companies.

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    Der Autor

    André Will-Laudien

    Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.

    About the author

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