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(Sharecast News) - RBC Capital Markets initiated coverage of SMID UK defence companies Cohort, Chemring and Qinetiq on Monday, with a preference for products over services.
The bank started Cohort and Chemring at 'outperform' with 1,570p and 500p price targets, respectively. It also initiated coverage of Qinetiq, with a 'sector perform' rating and 450p price target.
RBC said that after decades of underinvestment in European defence spending, a significant ramp-up is needed.
"Post Trump's recent call to raise NATO's defence spending target to 5% of GDP and amid high geopolitical tensions in Europe and the Asia-Pacific, many NATO members have recently set out ambitions to increase spending," it noted.
"According to Rheinmetall, European NATO defence expenditure could grow from circa 400bn to 969bn by 2030 if NATO spending targets increase to 3.5% of GDP.
"The European defence sector has rallied circa 60% year-to-date and c.400% since the start of the Russia/Ukraine conflict. Over the same period, forward adjusted EPS growth CAGRs have accelerated from circa 10% to circa 18%."
RBC expects all three companies to be key beneficiaries as nations ramp up defence budgets amid increasing geopolitical tension.
RBC said that Cohort and Chemring have "the clearest valuation upside", supported by record order books and strong earnings upgrade potential.
"We recognise Qinetiq's track record of exceeding UK defence budget growth, but we think confidence needs to be rebuilt through continued delivery," it said.
At 1040 BST, Cohort shares were up 4% at 1,328p, Chemring was 2.3% higher at 395.42p and Qinetiq was up 1.4% at 392.40p.
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