June 1st, 2022 | 11:06 CEST
ThyssenKrupp, Defense Metals, Rheinmetall - Defense stocks as portfolio boosters?
Table of contents:
ThyssenKrupp - Hydrogen as a growth driver?
In terms of sales in 2020, ThyssenKrupp ranks third among Germany's biggest defense companies. That means the defense division contributes around 5% of total sales. The Marine Systems unit is mainly responsible for this. In January, Israel ordered three new submarines. At this year's Annual General Meeting in early February, investor Dea called for a sale of the division. Meanwhile, the world looks different. The German government wants to make a special fund of EUR 100 billion available to the German Armed Forces. A slice of the pie could also end up with the Essen-based Group, as the steel division will also benefit from the new armaments drive.
In addition to the defense business, the hydrogen sector could also receive a significant boost. The topic was discussed at the World Economic Forum and the Group is determined to become the biggest consumer of hydrogen in Europe. To this end, around 7 billion is to be invested in the coming years in production processes based on hydrogen. The Group's problem lies in European emissions trading, which will cost the energy-hungry Company dearly from 2026. If the charges rise, it will no longer be possible to invest. On May 23, an EU commissioner learned about the planned climate-neutral steel production. On June 7 and 8, the EU Parliament will vote on the continuation of emissions trading from 2026.
The initiated transformation of the Group will continue to be led by Martina Merz in the coming years. The Supervisory Board has extended her contract until 2028. One of the tasks is the planned IPO of the electrolysis subsidiary Uhde Chlorine Engineers. This would bring urgently needed capital into the Essen-based company's coffers. The share was pushed down by the market as a whole to EUR 6.67, but since the good quarterly figures, which were boosted by rising steel prices, it has been climbing again. The current price for a share is EUR 8.91.
Defense Metals - Best drilling results so far
The Canadian company Defense Metals is developing a rare earth project called "Rare Earth" in Wicheeda. Rare earths are needed in a wide variety of fields. It starts with renewable energy, medicine, automotive, aerospace and defense. In this context, rare earths are used as technological spice metals because they have unique physical and chemical properties. Rare earths are considered strategically important because China is responsible for 90% of their processing. In order to maintain its independence, alternatives are needed. The Rare Earth Project has proven its economic viability in a PEA study.
In order to take the next steps, the private placement was completed on April 5, raising approximately 4.55 million Canadian dollars (CAD). In April, the Company announced successful results from last year's drill program. A total of 11 drill holes all showed high grades of rare earth metal oxide, peaking as high as 4.87%. Just the latest results revealed the highest grade and most powerful deposits. President and Director Luisa Moreno expressed her satisfaction, "A key objective of the 2021 drill program was to upgrade the existing suspected mineral resources to the indicated category. We are pleased that resource delineation drilling in the south of the Wicheeda deposit has confirmed and locally expanded the size of the high-grade dolomite carbonatite mineralization."
The next step is the preparation of a preliminary feasibility study. To this end, on May 24, the Company commissioned SRK Consulting, which had already produced the PEA study, to plan a geotechnical drilling program. With the results, the planning of the open pit mine can be advanced, and potential risks can be identified at an early stage. Due to the recent private placement and the challenging market environment, the share came under pressure and is currently trading at CAD 0.245. Therefore, interested investors can now acquire the share below the issue price of the new shares. The market environment for rare earths is currently better than ever.
Rheinmetall - Orders are pouring in
After Airbus, Rheinmetall is the largest armaments group in Germany. Although it also supplies parts to the automotive industry, its focus is on armaments. Its portfolio ranges from vehicles to weapons and related ammunition to sensors and training and simulation solutions. Since the start of the Ukraine crisis, the Düsseldorf-based company has been one of the top performers among defense stocks. The prospect of the German Armed Forces' 100 billion and an increased defense budget in the coming years make the outlook for the Company look bright.
On May 6, the Group reported increased profitability in the first quarter. At around EUR 1.3 billion, Group sales were on a par with the previous year, but operating profit rose from EUR 84 million to EUR 92 million. An increase of 10%. The margin increased by 0.6% to 7.3%. Despite rising order numbers, the annual forecast was merely confirmed. On May 17, 45 Boxer vehicles were ordered by Slovenia. On May 20, a major order for protective equipment worth EUR 250 million was received from a NATO customer. On May 25, the Company announced an order from the US Army. Then, at the end of May, a framework agreement was signed with the Spanish Armed Forces for grenade launcher ammunition.
If things continue at this pace, an increase in the forecast seems only a matter of time. Analysts at HSBC, UBS and Berenberg see the stock as a buy with price targets between EUR 220 and EUR 251. Warburg, Deutsche Bank, and Morgan Stanley are more cautious and have put the share on hold and issued price targets between EUR 199 and EUR 215. The share is currently trading at EUR 192.50, which is again above the 50-day moving average. The price/earnings ratio has risen significantly following the rally and is currently around 17.
Every investor must ask whether they wish to invest in defense companies. ThyssenKrupp is not a pure defense company and could therefore be a good alternative. Defense Metals offers the prospect of more independence from China. Especially in today's world, Germany's dependence on Russian energy shows how important autonomy can be. Rheinmetall has already done well but is benefiting from rising defense budgets. As an investor, however, the main focus here is on rearmament. An investment remains a moral question.
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