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Defence sector gets £16.5bn boost from UK defence spending hike

A new national Artificial Intelligence Agency was also announced, along with the creation of a National Cyber Force and a new ‘Space Command’

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A UK defence budget increase has been announced that could benefit companies including BAE Systems PLC (LON:BA.), QinetiQ Group plc (LON:QQ.) and Ultra Electronics Holdings PLC (LON:ULE).

Prime Minister Boris Johnson said the UK military budget would be increased by £16.5bn over four years, an increase of around 10%.

Saying the £16.5bn figure was a "misleading" way to present the figures, the Institute for Fiscal Studies (IFS) said the PM’s changes would mean £7bn of new money would be allocated to the annual defence budget by 2024/25.

Johnson said the four-year deal would protect current jobs and create 40,000 new roles, and would “transform our armed forces and bolster our global influence”.

Downing Street said it was the biggest programme of investment in British defence since the end of the Cold War, with the £16.5bn amount being the amount over and above the Conservative Party’s manifesto commitment to increase defence spending by 0.5% above inflation for every year of this parliament.

On existing forecasts, this is an overall cash increase of £24.1 billion over four years compared to last year’s budget.

“The commitment will allow the government to invest in cutting-edge technology, positioning the UK as a global leader in domains such as cyber and space and addressing weaknesses in our defence arsenal that cannot be allowed to continue,” Number 10 said in a statement.

Within the budget, spending on military research and development will be increased by at least £1.5bn extra to £5.8bn, including a commitment to invest further in the Future Combat Air System.

A new agency dedicated to artificial intelligence was also announced, along with the creation of a National Cyber Force and a new ‘Space Command’, capable of launching Britain’s first rocket in 2022.

Analysts at broker Liberum said: “Not only is there more money, but there is also more certainty, since Boris Johnson’s view seems to have prevailed over Rishi Sunak’s plan for a one-year settlement.”

Space and cyber are not areas of strength for Babcock International Group PLC (LON:BAB), Liberum noted, “but this is a clear positive for the industry and Babcock, and will reduce the pressure on some programmes”.

More detail from the MoD integrated review is now expected in January.

Among the big London-listed defence contractors, BAE Systems has a large cyber arm that works with governments and private companies, Qinetiq is the former tech arm of the MoD, and several of Ultra Electronics’ divisions sell into defence markets, including intelligence, communications, cybersecurity and electronic warfare. Babcock makes land, sea and air vehicles for the defence market and recently appointed a chief innovation & technology officer.

Other defence contractors include Chemring Group PLC (LON:CHG), Avon Rubber PLC (LON:SNR), while at engineers Meggitt PLC (LON:MGGT) defence represented 43% of its latest half-year revenue, and at Senior PLC (LON:SNR), defence sector sales represented 19%.

Shares in BAE and Chemring saw the biggest reaction to the news, both up more than 2%, while there was negligible movement in the rest of the sector. 

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