After years in the shadows, UK midcap defence stocks are enjoying a rare moment in the spotlight. One investment bank believes the rally still has further to run.
Launching new coverage on Monday, RBC Capital Markets named Cohort PLC (AIM:CHRT) and Chemring Group (LSE:CHG) as top picks among small- and mid-sized UK defence companies.
Both are rated 'outperform', with price targets of 1,570p and 500p respectively.
Top-rated
Analysts argue that product-focused businesses are better placed to benefit from the surge in global military spending than service-led groups such as QinetiQ Group PLC (LSE:QQ.), which they rate only 'sector perform'.
The backdrop is striking. Defence budgets are rising as geopolitical tensions escalate, and NATO allies face growing pressure to lift military spending towards 3.5% of GDP.
RBC estimates that European NATO defence budgets could more than double by 2030, creating powerful tailwinds for companies with the right exposure.
Cohort, a defence technology group specialising in naval communications and threat tracking systems, has a record order book and recently expanded into the Australian market through its acquisition of EM Solutions.
RBC forecasts annual earnings growth of 12% through to 2027, rising to 16% when acquisitions are included.
Chemring, which manufactures countermeasures and explosives, is also singled out for its growth potential.
Expansion plans
RBC highlights plans to expand Chemring’s explosives manufacturing capacity by 275% by 2028 as NATO nations scramble to rebuild ammunition stockpiles.
The broker values Chemring at 24 times forecast 2025 earnings, noting that stronger growth prospects could drive a re-rating against European peers.
By contrast, QinetiQ faces tougher challenges. The engineering services group, which supplies the Ministry of Defence and other governments, recently issued a profit warning, citing order delays in the UK and the US.
RBC expects its earnings growth to lag behind the wider sector and believes uncertainty around its US business, following the acquisition of Avantus, weighs on its valuation.
What next?
For investors, the divide between companies making physical products, such as missiles and decoy systems, and those providing services, such as research and testing, looks increasingly important. RBC’s advice is clear: back products.
With defence spending heading higher and valuations still lagging earnings upgrades, RBC views the recent pullback in UK small- and midcap defence shares as a buying opportunity.