Rheinmetall: Morningstar Initiates Coverage, Fair Value at €343

Morningstar equity analysts are now including the Düsseldorf-based defence company in their coverage, with analyst Loredana Muharremi taking the lead

Antje Schiffler 19 December, 2023 | 10:11AM
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Shares in German defence giant Rheinmetall [RHM] have almost tripled in value since Russia re-invaded Ukraine in February 2022. But at its current price of €284 (£243) it is still trading in undervalued 4-star-territory.

The Düsseldorf-based defence company mainly manufactures tanks and other military vehicles, but also builds weapon and ammunition. Since Russia's 2022 invasion it has secured contract after contract as Europe re-arms and ships supplies to the East.

According to the German Federal Ministry of Defence, projects with a total value of almost €47 billion have been tendered this year alone.

"We initiate coverage of Rheinmetall with a wide moat and fair value estimate of €343 per share, backed by expected rises in defense spending due to global threats and a strategic shift to ammunition and services," says equity analyst Loredana Muharremi.  

"The conflict in Ukraine is expected to boost immediate and long-term revenue as Germany and other NATO countries are supplying substantial defense equipment, including vehicles, to Ukraine, which will need to be maintained and replaced".  

Destocking Will Support Production in the Long Run 

In the last year, much of the talk surrounding the conflict has focused on aircraft and artillery. But the main concern has been ammunition, and in particular 155mm and 105mm shells widely used by western weapons.

"The consumption rate in Ukraine is depleting stocks rapidly, suggesting it might take a decade to rebuild inventories to former levels, for example in Germany," Muharremi says.

"Rheinmetall production is expected to rise from 100,000 rounds in 2022 to 700,000 by 2025, tripling sales from €1 billion to €3 billion".

This month alone the company has announced three major orders.

The German armed forces ordered ammunition for the Ukrainian armed forces worth hundreds of millions of euros, while Austria has signed an order worth more than €500 million to modernise the Skyguard air defence system. An unnamed NATO member state has also ordered ammunition worth €140 million specifically for the Ukrainian armed forces.

"The weapons and ammunition division presents the highest divisional adjusted EBIT at 25%," says Muharremi. The division is projected to grow at a 35% compound annual growth rate over five years.

Rheinmetall's electronics division should also benefit from defence digitalisation in Germany and its participation in the European Sky Shield Initiative, with procurement for Rheinmetall's Skyranger platform for the next three years expected to be about €5 billion.

In addition, the company also plays a role in the F-35 jet fighter programme as a fuselage manufacturer.

Rheinmetall has been listed in the DAX since March, when it displaced dialysis specialist Fresenius Medical Care AG.

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Antje Schiffler  is an editor for Morningstar in Frankfurt.

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