07 Nov 19. Get defensive. There are three conventional ways to go to war: air, ground and sea. On 2 September 2019, two Royal Air Force Typhoon jets race towards an ISIS training camp in northern Iraq, which has settled in a cluster of buildings in the desert. The aircraft, which have been designed by a European coalition that includes UK engineering giants BAE Systems (BA.) and Rolls-Royce (RR.), have six targets. Paveway IV missiles, manufactured by the UK wing of US defence behemoth Raytheon (US:RTN), are released from the planes. They destroy their targets.
Thousands of feet below, US Army Humvee vehicles roar across Iraqi sands on manoeuvres. The US military has been here for a long time now, and these cars have carried soldiers from the world’s most feared military force throughout. They are visually impressive, but they are unloved. In the past, the Humvee was prone to flipping when travelling around corners, and soldiers have been paralysed and killed in accidents. The HMMWV Rollover Mitigation program became a priority for the US Congress, and in 2016 UK automotive engineer Ricardo (RCDO) was brought in to fit an antilock braking and electronic stability control system to the vehicles. The initiative was successful, and the Humvee’s fatal design flaw was eliminated.
Over a thousand kilometres away, the Royal Navy’s HMS Duncan sails in support of a French carrier strike group in the fight against ISIS. The Type 45 destroyer is laden with British technology, ranging from Rolls-Royce gas turbines and a BAE naval gun to Ultra Electronics (ULE) weapons and radar systems. She is ferrying French Rafale fighter jets through the Mediterranean and providing aerospace battle support in missions against ISIS. Rafale is manufactured by Dassault (FRA:DSY) and is regarded as the French rival to the Eurofighter Typhoon. But HMS Duncan’s Lieutenant Luke Thompson says that “our two navies working so closely together in the Mediterranean shows how much our people and our kit complement each other”.
These are three landscapes for combat, with three militaries, working interdependently in one conflict – all sustained by the might of the British aerospace and defence industry.
There are, of course, more than three ways to fight a war. Britain’s nuclear capability, which hums beneath the sea, is trumpeted as our ultimate deterrent. Cyber warfare is central to our national security strategy. Drones and other forms of autonomous warfare straddle the three main formats. UK defence companies are at the forefront of the future of war, and this offers extensive opportunities for retail investors.
A safe sector
This industry is a critical cog in the UK economy. In 2018, the UK won defence orders worth £14bn – its best year ever, which was up on the previous year’s total of £9bn. Our share of the global defence export market was estimated at 19 per cent in 2018, which was the second-highest in the world. We are ahead of Russia and France, although markedly behind the US, which is a key market for UK defence players. The opposition from some quarters to Cobham’s (COB) planned takeover by US private equity firm Advent International exemplifies the pride that many in this country take in its defence industry, which, as other industries move overseas or simply evaporate, demonstrates Britain’s edge and ability in modern-day manufacturing. Compare the growth prospects of the defence industry with the fate of UK steel and fossil fuels, for example.
It is a vital source of jobs in the UK, too. A September 2017 report by the Department for Business, Enterprise and Industrial Strategy (BEIS) describes the industry as “a strong contributor to the manufacturing base”, directly employing more than 140,000 people and providing places for 4,300 apprentices. The September 2019 announcement of Babcock (BAB) as the preferred bidder for the UK’s Type 31 frigate programme was heralded by unions, including Unite, whose assistant general secretary for manufacturing, Steve Turner, described the decision as “one piece in the jigsaw needed to secure the future of UK shipbuilding and the thousands of jobs that it sustains in communities across the country”.
Babcock will manufacture five ships at a cost of £250m per vessel, with construction set to commence in 2021 in the Rosyth dockyard in Fife, Scotland, and conclude in 2027. Unite now wants to ensure that these British ships will be built with British steel. With national security comes investor security – the defence industry is a national treasure, one backed by extensive government funding and a higher, more symbolic sentiment. As well as their growth prospects, there is a unique level of assurance for investors in defence stocks compared with, say, previous backers of the UK car industry.
But the make-up of armed forces around the world has shifted. A monopolistic industry with governments representing single buyers, defence companies’ offerings represent and reflect the demands bestowed upon them by the world’s largest militaries. The Cold War era, which saw hordes of tanks, planes and warships massed on borders in large numbers is gone, and forces are now smaller in number. Yet the sophistication of their technologies has increased, and with this unit costs have gone up. After years of austerity across Europe, so have defence budgets. China is a relatively new military power, and Russia is resurgent – this brings restrictions from established partners on which nations companies can do business with. Then there is the cost of doing business. There is a huge onus on aerospace and defence companies to invest in the research and development of cutting-edge technologies, such as autonomous planes, submarines and weaponry.
The sky’s the limit
The world’s first military aircraft was not born in the UK. It was manufactured by the Wright brothers and sold to the US Army Signal Corps in July 1909. The Wright Military Flyer could fly at more than 40mph, powered by twin propellers turned by a four-cylinder engine. It cost $30,000 per plane.
Aerospace engineers on both sides of the Atlantic have achieved a remarkable rate of progress in under a century. A Eurofighter Typhoon pilot can tear across the skies at a top speed of around 1,550mph. UK aerospace and defence companies, such as Meggitt (MGGT), Senior (SNR) and Rolls-Royce, supply a wealth of components and engines to American and European planes that have increased in sophistication and ingenuity. Costs have risen accordingly.
Indeed, US defence orders are vital to many UK companies. Some groups, such as Meggitt, consider it to be their main defence market. Last year, the US spent $633.57bn on its military, according to research company Statista, up nearly 5 per cent on its 2017 budget. US defence spending accounts for 15 per cent of total federal expenditure, according to the Peter G Peterson Foundation. This is a lucrative market for UK companies, and a welcome shield from Brexit uncertainty for investors.
European governments have, meanwhile, identified the need to refresh their militaries following a period of lower budgets, and spending has risen. The UK’s latest review of its defence expenditure in September brought a 2.3 per cent increase in the core UK Ministry of Defence (MoD) budget, excluding operations, for 2020-21. According to the Royal United Services Institute (RUSI), bringing the four-year real-terms increase in core defence spending to 9.6 per cent is the biggest such increase since the early 1980s.
In 2015, the UK’s strategic defence and security review confirmed the government’s intention to buy 138 F-35 Lightning jets. The aircraft, developed by Lockheed Martin (US:LMT), forms a core part of the Royal Air Force’s (RAF) fleet and is supplied by a host of UK-listed businesses. Meggitt recently signed a three-year, $65m contract with Lockheed Martin to supply rudder pedal assemblies on the F-35, while in its 2019 half-year results, Senior observed that longer-term growth in its defence offering “will be supported by further increases in the F-35 programme”.
One of the MoD’s key responsibilities lies in identifying the needs of the UK’s three services, which submit their own requirements to the ministry. But far from competing with each other for government funding each year, they effectively take turns for funds, according to Keith Hartley, emeritus professor of economics at the University of York.
“Each of the services enters the queue, and they know full well that they’re not going to oppose the other services’ requirements, because they see themselves as next in the queue,” he says, suggesting “an element of collusion between the services, rather than competition”. There is an interdependence between the services’ needs and the allocation of resources, though.
The F-35 is the obvious candidate for the proceeds from the increase in expenditure, Professor Hartley says, because of the MoD’s recent procurement of aircraft carriers. In September, the £3bn HMS Prince of Wales aircraft carrier exited the Rosyth dockyard for the first time, and the first F-35s took off from the vessel in October. “Having bought the damn things, we’re going to have to put even more expensive equipment on them to operate them and make them worthwhile,” he adds, “because without aircraft they’re useless!”
A longer-term opportunity for UK companies lies in the successor to the Eurofighter Typhoon. The likes of Meggitt, Senior and Ultra Electronics all supply equipment and technology to the jet, and will undoubtedly look to support the Tempest fighter, a project led by BAE Systems, Leonardo, Rolls-Royce and missile manufacturer MBDA, along with the RAF and the MoD, which has so far committed a £2bn investment.
Tempest will take to the skies in 2035, with the option of flying manned or unmanned. It will incorporate the absolute forefront of aerospace technology, including a virtual cockpit, which will be shown in a pilot’s helmet display. And although it is intended to replace the Typhoon, these two technological marvels may end up dominating the skies alongside each other.
Engineering growth
There is therefore a myriad of components across a military jet – brakes, radio and decoy systems that can fool a heat-seeking missile, for example – that support earnings growth across the aerospace and defence sector. These contracts can be agreed for relatively long time periods and roll on, and on, providing stable income sources for companies. But there is one part of a plane that is particularly lucrative for aerospace and defence players.
There lies a wealth of opportunity beneath the bonnet of a military jet. Rolls-Royce engines sit in the bellies of some of the world’s leading fighter planes, and the company is developing a new power plant for the much-awaited replacement for the US B-52 bomber. Rolls-Royce, which is the second-largest producer of jet engines in the world, says that it adds $8.6bn to the US economy, with over $2bn invested here and 6,000 employees. More than simply selling the engines, Rolls-Royce earns income from engine maintenance, and is investing here too. It is partnered with robotics partners, including Harvard University and the University of Nottingham, to explore embedding robots within engines to improve monitoring, along with robots that could inspect and fix engine problems.
Meggitt, meanwhile, agreed a $750m, 10-year contract in January 2019 with US engine titan Pratt & Whitney for the supply of parts for its F135 and F119 engines, which power the F-22 Raptor and F-35 aircraft. Meggitt generates 35 per cent of its income from defence, three-quarters of which is earned in the US.
The civil and defence aerospace markets typically run in counter-cycles to each other, according to Meggitt chief executive Tony Wood. Good times for the civil market can often coincide with a lull in defence, and vice versa. But Mr Wood has observed strong momentum in both areas, albeit slower growth in the civil market. “For companies like us, where we’re trying to have duality of applications of our technology across both markets, that’s been quite advantageous,” he says.
While it was historically the case that the battlefield proved the testing ground for civil aerospace technologies, Meggitt’s chief executive says this flipped through the late 1990s and into the new millennium. The vast majority of modern military innovation is now carried across from the civil market. Meggitt tends to fund the invention stage of a product or technology, while its customers will finance the development stage of its product.
Defence remains a very attractive market, Mr Wood adds. “It has a higher return on capital,” he says, because the customer is typically providing some funding. This also reduces the level of risk attached to a project. “A sovereign owner for a programme has generally been a more reliable owner than a commercial owner,” he observes.
Boots on the ground
We have established that defence stocks can offer UK equity investors their own body armour to protect against the headwinds of manufacturing decline, both at home and overseas. Protecting those who protect us on the ground has also become a significant earnings driver for London-listed companies – and not just the obvious defence juggernauts.
Ricardo is predominantly an automotive engineer and consultancy. But as car sales continue to struggle across the world, the company recognises strength in diversity and has broadened its operations. Defence has grown rapidly as a proportion of Ricardo’s operations and now makes up about 10 per cent of the business – it expects to hold this share over the near term. But defence can offer Ricardo a source of growth while its primary end market is weak.
As well as remedying the woes of the US Humvee, Ricardo has been busy fitting military cars, tanks and ships with technologies aimed at extending their lifespans, improving fuel efficiency and upgrading software. Its anti-brake system orders have exceeded $12m over its full year, with between 25,000 and 50,000 US army vehicles suitable for the upgrade, and the system has a potential worldwide market of 100,000 vehicles in more than 50 countries.
“There’s a lot more forward-looking activity that we do in the US,” says chief executive officer Dave Shemmans, which includes hybrid vehicles and a focus on fuel consumption, enabling servicemen to carry less fuel to the front line of combat. Not exclusive to Ricardo, however, are the limitations on business imposed by certain governments, and the US and UK both have countries deemed out-of-bounds for Ricardo. The US has a longer list of proscribed countries. “If they’re off-limits for the US we tend not to go and work with them because the US is such a big part of our business,” he adds. A surge in defence spending in China and Russia will not necessarily result in new markets for the likes of Ricardo, then.
A rise in the use of chemical weapons in the Middle East has also necessitated upgrades to troop protection, which has created opportunities for UK companies. In November, Chemring (CHG) announced that it had secured the order of a further 75 units under the US Department of Defense’s (DoD) Aerosol & Vapour Chemical Agent Detector (AVCAD) programme after an initial contract award for indefinite quantities and deliveries last year, as the US seeks to bolster its defences against chemical warfare. Smiths Group’s (SMIN) detection business is also a supplier to this project. The overall programme is valued at $838m.
Avon Rubber (AVON) is heavily involved in protecting soldiers from chemical weapons. The company’s core business is making respiratory equipment for military, fire and law enforcement personnel, while it also manufactures milking equipment for dairy farmers. Its relationship with the DoD is the cornerstone of Avon Rubber’s respiratory work, representing 40 per cent of its addressable market. “Avon has been very successful in the US,” observes independent defence and aerospace analyst Howard Wheeldon.
Avon chief financial officer Nick Keveth commented that the company is looking to make inroads beyond its key market. “In Europe, austerity means there’s quite a lot of old equipment out there in this area, and that increasing trend of usage is now exposing a number of countries’ militaries with a need to upgrade and modernise their equipment.”
Chemical weapons are no longer exclusive to the battlefield and have found their way into the streets and airports, Mr Keveth observes, and this type of warfare has been on the rise in Syria and Iraq. Combatants now want to use respiratory protection for longer periods of time and have these systems integrated with electronics equipment. They’re relatively affordable, too, with Avon Rubber’s general service respirator masks costing between $100 and $500.
Avon is also carving out a niche in a more specialised market for respiratory equipment. Significant investment is being made in underwater equipment, and the company has developed deepwater military rebreathers that can be used for up to eight hours, at a maximum depth of around 100m. There are probably only around 4,000 to 5,000 specialist divers in the world conducting these types of operations, Nick Keveth says, and accordingly Avon’s deepwater product costs around $75,000. At the top end of our fag-packet calculations, that is an addressable market of $375m.
Preparing for China
Britain can trace its naval origins back to the time of Henry VIII, and the Royal Navy is recognised as the country’s ‘Senior Service’. Our maritime capability remains essential to our national security, and today there is a veritable ocean of naval opportunities for UK defence companies around the world. Along with its recent Type-31 announcement, a resurgent Babcock agreed a £864m joint venture last year to provide ship management services to the Australian navy, and is also very active in Canada and South Korea. In Korea, Babcock is investing heavily in support of the nation’s submarine programme.
Cohort (CHRT) chief executive Andy Thomis highlights nascent submarine demand in the east. China has high ambitions across its military services, but has placed particular emphasis on its navy, he adds, while the overall geopolitical picture is deteriorating.
“We’re seeing, particularly in Asia, the proliferation of submarines, as China and India both grow their fleet, looking for regional dominance,” Mr Thomis says. This has prompted a response in demand for submarines from the likes of Thailand, Indonesia, Malaysia and Vietnam, he adds, along with an increasing need for anti-submarine warfare systems. SEA, a Cohort subsidiary, provides an array of submarine weapons, decoy and communication systems.
The old powers, too, have a critical need for cutting-edge naval technologies. Ultra Electronics’ corporate marketing director Chris Binsley spots an opportunity to capitalise on the US’s growing instinct for competition against Russia and China, as it balances its counter-terrorism objectives with a return to conflict with great powers. Ultra’s main offerings are in the maritime and ‘C3’ (command, communication and control) domains – its core market is the ‘Five Eyes’ network of the US, the UK, Canada, Australia and New Zealand. The network requires compatible communications systems, and Ultra products can be found on board surface ships and submarines, including technologies such as sonar systems for boats such as the Royal Navy’s Type 23 and Type 26 frigates and Australia’s SEA 5000 vessel.
Mr Binsley, too, sees a realignment of funding origin for defence technology. Companies are looking to align themselves with governments’ defence priorities in order to identify where their technologies can be overlaid on big mission systems, and partnerships are evolving between the public and private sectors. “Whereas governments would often fund a lot of these big programmes before and you’d often find a lot of defence technology flowing into the commercial field later on,” he says, “it’s actually becoming a bit more 50/50”.
The future of war
A return to Cold War battle lines may have prompted a build-up in more conventional weapons systems, albeit ones that can talk to each other via the internet and pilot themselves autonomously. Drones are an exciting development, with Cohort’s counter-drone specialist subsidiary Chess remaining at Gatwick Airport in defence against drones, as well as protecting military forces from the threats posed by these new beasts. But one threat to our national security encompasses the three traditional fields for combat, along with the entirety of our national infrastructure.
“Cyber is the most important threat that the UK is under,” analyst Howard Wheeldon says, adding that this is true for all nations. “We went late into the game, but we didn’t put enough money into it.” More funding has enticed businesses such as BAE Systems into supporting the government’s objectives on cyber security. Once again, it is clear that governments will not act alone in inventing, innovating and indeed funding the defence systems we need to protect ourselves. It is even clearer that investors stand to gain from exposure to stocks that thrive on the geopolitical uncertainty that has threatened nearly every other industrial activity. (Source: Investors Chronicle)
07 Nov 19. Leonardo reports 10.8% rise in 9-mth revenues, confirms guidance. Italian defence group Leonardo (LDOF.MI) reported a 10.8% rise in its nine-month revenue to 9.1bn euros (£7.8bn), pushed by its helicopter division and its Electronics & Security business.
Earnings before interest, tax and amortization, or core profit, grew 8.5% percent to 686m euros.
New orders in the third quarter were down compared to the same period last year, when the state-controlled group had benefited from a sizable helicopter contract with Qatar.
Leonardo confirmed its 2019 guidance, which sees core profit in the range of 1.175-1.225bn euros. (Source: Reuters)
07 Nov 19. Rolls-Royce sees profit at lower end of range on engine troubles. Disruption from its Trent 1000 engines weighs on the aero-engine group. Rolls-Royce has warned it expects profits to come in at the lower end of its guided range and recorded a hefty charge as the disruption from its troubled Trent 1000 engines weighs on the aero-engine group. The FTSE 100 group expects to take a £1.4bn exceptional charge to its full-year profits as a result of the engine troubles, which have forced it to embark on an extensive programme of repairs and redesign some components after turbine blades on certain variants of the engine corroded faster than expected. The charge includes the costs of customer disruption, investments in additional maintenance and spare engines and provisions against future losses. Across the period between 2017 and 2023, Rolls-Royce expects cash costs from the engine troubles of around £2.4bn. Rolls-Royce said it expects its operating profits for the financial year to come in at the lower end of the previously guided range of £600m to £800m. Warren East, chief executive, said his top priority is improving customer confidence in the engines. “We deeply regret the ongoing disruption caused to customers,” he said. The engine issues pushed Rolls-Royce into the red last year, and has soured relations with major customers including British Airways, which have had flight schedules disrupted. On Thursday, Rolls-Royce said it has made progress in resolving the Trent issues, and has only one major design fix remaining. However it has also postponed improving the high pressure turbine blade for the Trent 1000 TEN, which it described as “the final fundamental issue to address”, to 2021. “Although we regret that the blade will not be ready when we had originally planned, our understanding of the technical issues has significantly improved,” Mr East said. “As a result we are now able to reset our financial and operational expectations for the engine based on a blade design with a prudent durability estimate that we are confident we can deliver.” (Source: FT.com)
07 Nov 19. Cadence Aerospace (Cadence), a portfolio company of Arlington Capital Partners (Arlington Capital), has acquired B&E Group’s OEM Manufacturing Division (B&E), a provider of complex and difficult-to-machine engine components for aerospace and defence customers. Similar to Cadence’s existing Tell Tool and ADM facilities, B&E focuses on hard metal and complex engine components, and is headquartered in Southwick, MA (40,000 sq ft facility), with another 30,000 sq ft facility in Westfield, MA. B&E will continue to be run by Bob Quaglia and the existing management team.
Peter Manos, a Managing Partner at Arlington Capital, says: “The acquisition of B&E builds on our investment thesis for Cadence by further expanding the Company’s exposure to extremely complex and difficult to manufacture aerospace and defense components. The combination of B&E and Cadence’s Tell Tool and ADM divisions creates one of the leading and most technologically sophisticated engine components manufacturers in the industry. Combined with Cadence’s strong position in complex structural components, this acquisition further positions Cadence as a critical leader in the aerospace and defence supply chain.”
Thomas Hutton, CEO of Cadence, says: “We couldn’t be more pleased to partner with Bob and the entire B&E management team, and further build upon the excellent work they have done in creating a successful enterprise. B&E brings a wealth of best-in-class employee talent across the board, and has a phenomenal culture that will meld together well with Cadence’s existing employees. B&E moreover has an outstanding reputation in the market and possesses excellent technical capabilities in making difficult parts. Furthermore, there are numerous opportunities to leverage Cadence’s turn-key capabilities and low cost country offerings at B&E and vice versa, which will make the combined business a more nimble and flexible organisation for its customers. We look forward to partnering with the entire B&E team to drive additional growth over the coming years.”
Bilal Noor, a Vice President at Arlington Capital, says: “We are extremely excited to add B&E to the Cadence family. B&E provides excellent complementary and adjacent capabilities to Cadence’s existing engine and systems focused businesses, and further enhances the combined business’ portfolio of work, with key work statements on next-generation aerospace and defense growth platforms, including the LEAP, GTF, and F-135. We look forward to continuing to invest in B&E’s equipment, capabilities, and operations.” (Source: Google/https://www.privateequitywire.co.uk/)
07 Nov 19. Rheinmetall in the first nine months: Growth in sales and earnings – Strong Defence sector offsets downturn in Automotive.
– Consolidated sales rise 3.1% in first three quarters to €4,294m
– Consolidated operating earnings improve 3.9% to €262m
– Automotive characterized by weak market environment: sales decline by 4.6% to €2,099m – operating margin 6.9%
– Defence sales rise by 11.8% to €2,198m, operating earnings almost double to €134m; operating margin widens from 3.8% to 6.1%
– Group order backlog still at high level of €9.2bn
– Earnings per share rise 5.0% to €3.77
– Sales outlook adjusted downwards due to weaker automotive economy
– Group forecast for operating margin confirmed at 8%
With sales growth and a further improvement in consolidated operating earnings, the Düsseldorf technology group Rheinmetall AG is on the home stretch for fiscal 2019. Thanks above all to the strong Defence sector, the Group’s business performance in the first nine months of the fiscal year remains robust despite the consistently weak state of the automotive industry. The Group’s Defence sector more than compensated for the downturn in Automotive with a strong increase in sales and significantly higher profitability.
Armin Papperger, CEO of Rheinmetall AG said: “Our Defence sector is performing splendidly with its impressive sales and earnings development. We are benefiting from the backlog of demand in military procurement in a number of countries and from rising budgets, particularly in Germany. We hold a promising position on many growth markets and in key major projects. We have been unable to escape the downbeat economic situation in Automotive, though we are still putting up robust profitability figures thanks to rapid cost adjustments. The fact that our pioneering technologies and global network of locations give us a footing on key markets is helping us out. Our solutions for reducing emissions and fuel consumption in cars and for alternative drive technologies mean that we have a handle on key fields that will continue to be in demand moving ahead.”
Consolidated sales rose by €130m or 3.1% year-on-year to €4,294 m in the first three quarters of 2019. Sales were up by 2.1% after adjustment for currency effects.
The Group’s sales increase related entirely to the significant growth in the Defence sector, where sales were €232m higher in the first three quarters. By contrast, sales in the Automotive sector were €100 m lower than the previous year’s figure owing to the declining trend in global automotive production.
Operating earnings rose by €10m or 3.9% to €262m in the first nine months of 2019 as against €252m in the same period of the previous year.
The two sectors are making similar contributions to the Group’s earnings. While operating earnings in the Defence sector increased by €59m to €134m, the Automotive sector fell short of the previous year’s figure by €49m with operating earnings of €144m.
The consolidated operating margin is unchanged year-on-year at 6.1% in the reporting period.
Earnings per share rose by 5.0% from €3.59 to €3.77 in the first nine months.
The order backlog is at the same high level as in the previous year. Rheinmetall had orders worth €9,183m on its books as of September 30, 2019 compared with €9,315m as of September 30, 2018.
Automotive: Weak automotive industry influences sales and earnings
The Automotive sector was unable to escape the ongoing decline in the international automotive industry. At €2,099m in the first nine months of 2019, the division’s sales fell short of the figure for the same period of the previous year by 4.6% (adjusted for currency effects: 5.4%). However, sales were therefore slightly better overall than global production of light vehicles, which was down by 6.0% in the first three quarters of 2019.
Operating earnings contracted by €49m year-on-year to €144m (previous year: €193m) in the reporting period, resulting in an operating margin of 6.9% after 8.8% in the previous year.
Sales in the Mechatronics division declined by €67m or 5.4% as against the previous year to €1,166m in the first three quarters of 2019. This essentially results from passenger car diesel business, which remains soft. Operating earnings amounted to €92m for the first nine months of 2019 after €128 m in the same period of the previous year. In addition to negative effects from the decline in sales, earnings were squeezed by the necessary outlay for new customer projects.
The Hardparts division generated sales of €731m in the first nine months of 2019, a year-on-year reduction of €24m or 3.1%. This development resulting primarily from weaker truck business and declining sales with products for industrial applications. At €29m, operating earnings were down on the previous year’s figure of €50m. The development in earnings was influenced by declining sales and difficult product ramp-ups.
In the first three quarters, sales in the Aftermarket division of €269m were €12m or 4.2% lower than the previous year. Reductions in sales were mainly reported in North Africa, the Middle East and Western Europe. Operative earnings were kept stable year-on-year at €25m (previous year: €26m), thanks above all to cost-cutting measures and an advantageous product mix.
The Chinese joint ventures not included in the Automotive sector’s sales figures achieved significant growth of 9.2% to €722m in the first nine months of 2019 (previous year: €661m). Adjusted for acquisitions, sales growth at the joint ventures still amounts to 5.0%. This clearly outperformed the Chinese automotive market, where light vehicle production decreased by 12% in the first nine months of 2019. Earnings after taxes amounted to €32 m for the nine months of 2019 (previous year: €30m).
Defence: Strong rise in sales and operating earnings, profitability rises to 6.1%
The Defence sector achieved significant sales growth of 11.8% or €232m in the first three quarters. Sales climbed to €2,198m after €1,966m in the same period of the previous year. Growth was 10.6% after adjustment for currency effects and acquisitions.
The Defence sector achieved a substantial earnings improvement in connection with this sales growth. Defence reported operating earnings of €134m after three quarters, an increase of around 80% or €59m compared to the prior-year figure of €75m.
Hence, the improvement in the operating margin was particularly significant, rising to 6.1% in the first nine months of 2019 after 3.8% in the same period of the previous year.
The Defence sector reported an order intake of €2,201m in the first three quarters of 2019. This is a reduction of 51% compared to the prior-year figure, though this had been influenced by the largest single order in the company’s history, namely the Australian order worth more than €2bn for Boxer vehicles.
Sales in the Weapon and Ammunition division fell marginally by €3m or 5% in the first nine months to €581m. The division’s sales development is being slowed by a lack of export licenses and production downtime resulting from a plant accident in South Africa. Operating earnings declined by €5m to €9m.
The Electronic Solutions division reported an increase in sales of €92m or 19% to €585m. A key factor driving this sales growth is the “Future Soldier” systems currently being delivered to the German armed forces. Operating earnings improved by €35m to €47m.
The Vehicle Systems Division increased its sales significantly by €112m or 10% year-on-year in the first three quarters of 2019. Operating earnings rose by €16 m to €80m. In particular, the rise in earnings was caused by positive volume effects in the logistics vehicle segment (trucks).
Outlook for Automotive adjusted in line with market developments –
Group forecast for operating margin confirmed
Owing to the downturn in global automotive production, for fiscal 2019 the Rheinmetall Group currently expects sales growth to be weaker than previously forecast.
Based on around €6.1bn in fiscal 2018, the Rheinmetall Group’s annual sales are expected to grow – organically and before currency effects – by slightly more than 1% in the current fiscal year. The Group had previously been forecasting sales growth of 4%.
In the Defence sector, sales are set to expand – organically and before currency effects – by around 9%. This is at the lower end of the original forecast range of a sales increase between 9% and 11%, with outstanding export licenses at two foreign subsidiaries resulting in lower sales.
However, experts’ forecasts for future global automotive production have deteriorated since July 2019. The experts at IHS Markit have since lowered their forecast for 2019 to a production downturn of -5.8%. Rheinmetall assumes that global automotive production will not recover in the fourth quarter of 2019, and is projecting a drop in production worldwide of between 6% and 7% for the year as a whole. In light of this, Rheinmetall is forecasting that sales in the Automotive sector will decrease by around 7% in 2019, having previously anticipated a reduction of between 2% and 3%.
Based on these market expectations for automotive business and the new sales forecast derived from them, Rheinmetall is projecting an operating margin of around 6.5% in the Automotive sector in 2019, slightly lowering its previous forecast of around 7%.
In the Defence sector, Rheinmetall is forecasting a further improvement in operating earnings in fiscal 2019 and that the operating margin will rise to slightly above 9.5%. This marks a further improvement compared to the end of the first half of 2019, when the forecast had been raised to 9%. Taking holding costs into account, the Rheinmetall Group’s forecast for the consolidated operating margin for 2019 as a whole is unchanged at around 8%.
06 Nov 19. PGZ pursues ‘strategic reorientation’ of two aviation businesses. Polska Grupa Zbrojeniowa (PGZ – Polish Armaments Group) intends to complete the consolidation of two of its enterprises in 2020. Plans to merge Warsaw-based Wojskowe Zakłady Lotnicze 2 (WZL-2) with Bydgoszcz-based Wojskowe Zakłady Lotnicze 4 (WZL-4) were unveiled in October 2019.
“The market in which both companies operate is changing, along with ongoing change in Poland from post-Soviet aircraft to most modern multirole aircraft,” PGZ management board member Michał Kuczmierowski said in a 6 November statement.
The Bydgoszcz and Warsaw plants “must undergo a strategic reorientation process” if PGZ is to maintain its ability to service equipment, he added. WZL-2 and WZL-4 employ a combined total of about 1,300 workers. (Source: IHS Jane’s)
06 Nov 19. Spanish defence cluster now exceeds 20 companies. Three more companies have joined Spanish defence industry cluster CID (Clúster de la Industria en Defensa). The addition of cyber-defence and C4ISR specialist DefSec Consulting, industrial designer Grupo PI, and big data/blockchain developer Diatomea Technology brings the total number of companies in the cluster to 21. Cantabria-based CID was established in July as the first defence-industry cluster in Spain, with an initial emphasis on the development of unmanned submarine and surface naval craft. (Source: IHS Jane’s)
05 Nov 19. Kaman to Acquire Bal Seal Engineering, Inc., Significantly Expanding and Diversifying Portfolio to Drive Continued Shareholder Value. Complementary Acquisition Directly Aligned with Strategy to Grow Highly Engineered Product Offerings. Diversifies Reach into High-Growth and High-Margin Medical and Industrial End Markets.
Transaction Expected to be Accretive to Cash Flow in Year One with Additional Opportunities to Drive Meaningful Margin Expansion.
Kaman Corporation (NYSE:KAMN) and Bal Seal Engineering, Inc. (“Bal Seal”) today announced that they have entered into a definitive agreement under which Kaman will acquire Bal Seal for $330m in cash, subject to customary adjustments for net debt and working capital.
Bal Seal has been a leader in the design, development, and manufacturing of precision springs, seals, and contacts for the last sixty years. With a strong platform of more than 240 patents across its proprietary manufacturing and material technologies, Bal Seal specializes in delivering critical components to customers in the medical technology, aerospace and defense, and industrial end markets. Bal Seal has an established global presence, with manufacturing, sales, and distribution operations across the U.S., Europe, and Asia, as well as additional resources around the world to ensure the quality and reliability of its products. For the full year 2019, Bal Seal expects revenues of approximately $95m.
“Following the recent sale of our distribution business, Kaman’s strategic focus has centered on growing our highly engineered products business, enhancing margins, and driving free cash flow generation,” said Neal J. Keating, Chairman, President and CEO. “This complementary acquisition of Bal Seal will advance all three objectives by expanding the breadth of our product offering, increasing our exposure to attractive high growth markets, and driving meaningful near-term margin and cash flow accretion. We are especially excited to add the strong Bal Seal management team to our organization while leveraging their leading proprietary technology, breadth of products, and strong customer relationships.”
Rick Barnhart, President, Kaman Aerospace Group added, “Like Kaman, Bal Seal prides itself on its outstanding product quality, strong leadership and employee talent, and an unrelenting commitment to innovation. We believe our similar cultures and customer-centric approaches make our organizations an excellent and highly complementary match. We are excited for Bal Seal employees to join the Kaman team and work together to build strong alliances with our customers.”
“The combination of Bal Seal and Kaman represents a compelling opportunity for Bal Seal, our employees, and all our stakeholders,” said Rick Dawson, President and Chief Executive Officer of Bal Seal. “We look forward to leveraging Kaman’s scale, resources, and complementary capabilities to further extend our leadership positions and penetrate new markets with our combined offerings. We have known and respected the team at Kaman for many years and view them as ideal partners to help unlock the full potential of Bal Seal. We are excited to work closely with the Kaman team to ensure a smooth integration and capitalize on exciting new opportunities for growth.”
Strategic and Financial Benefits of the Transaction
Establishes a Leading Engineered Products Provider: With a larger and even more extensive portfolio of engineered products and offerings, the combined company will be better able to serve customers across a range of critical applications. The combined company will leverage Kaman’s expertise in running a solutions-based business and Bal Seal’s proprietary manufacturing and material science technologies to enhance its engineered products business and add scale to its operations.
Provides Access to New, High-Growth End Markets: The combined company will have broad exposure to attractive end markets with significant growth potential, including medical, industrial, and aerospace and defense. With Bal Seal, Kaman will have a strong position in the higher growth medical end market.
Delivers Financial Benefits: The transaction is expected to be accretive to Kaman’s cash flow in the first year following the close of the transaction. The addition of the Bal Seal family of products to the Kaman portfolio of highly engineered products will be margin accretive. The purchase price, which Kaman will fund with cash on hand, values Bal Seal at 12.5x EBITDA, including estimated tax benefits and synergies.
A presentation providing an overview of the key transaction terms and strategic rationale has been posted to our website at www.kaman.com/investors/presentations.
Approvals and Time to Close
The transaction is expected to close before year end, subject to customary closing conditions, including regulatory approvals in the U.S. and Germany. (Source: BUSINESS WIRE)
05 Nov 19. LinQuest Acquires High-Growth, Advanced Data Analytics Provider, The Perduco Group. Complementary Combination Expands LinQuest’s Capabilities and Customer Set and Advances Its Strategic Growth Plan.
LinQuest Corporation (“LinQuest”), a leader in space systems technology solutions for U.S. defense and intelligence communities, announced today that it has completed the acquisition of The Perduco Group (“Perduco”), a high-growth and leading provider of advanced data analytics, data architecting and model-based simulation to defense and civilian agencies. Together, Perduco and LinQuest will deliver enhanced industry-leading decision analytics, operations research, artificial intelligence, machine learning, and mission planning capabilities. This comprehensive services offering will strengthen the combined organization’s market position as a trusted technology solutions partner for military and intelligence community customers.
“Perduco’s corporate values and proven track record of excellence strongly complement LinQuest’s core values and commitment to excellence in a customer-first approach,” said Tim Dills, CEO of LinQuest. “This acquisition will create a comprehensive suite of solutions to provide our customers with specialized tools to achieve mission-critical objectives more effectively than ever before.”
The acquisition brings LinQuest an expanded contract portfolio with multiple contract paths for its defense customer base. Contract vehicles include the GSA Multiple Award Schedule (MAS), the Small Business Innovation Research (SBIR) program and the DoD’s Rapid Innovation Fund. Additional active contracts support The Air Force Research Laboratory, the Air Force Materiel Command, the Air Education and Training Command and the intelligence community. Perduco’s existing customer base has limited overlap with LinQuest’s current footprint and includes a number of promising opportunities for LinQuest.
With the support of its majority investment partners, Madison Dearborn Partners and CoVant Management, LinQuest has focused on growth by scaling its R&D capabilities and expanding its customer offerings. The acquisition of Perduco is consistent with this strategy and furthers the company’s leadership in space systems technology solutions.
“We’re proud to be joining industry-leader LinQuest, a company that shares our commitment to technical innovation and customer experience,” said Stephen Chambal, CEO of The Perduco Group. “Together, we will deliver a seamless and holistic experience for our military and intelligence community customers designed to more effectively meet their needs on the battlefield and at home.”
Perduco and its leadership team will operate as a business unit within LinQuest, providing focused and uninterrupted support to customers.
Baird served as LinQuest’s financial advisor with Kirkland & Ellis LLP and Crowell & Moring LLP serving as legal advisors. Jones Day served as legal advisor to Perduco. As part of the transaction, Bank of America Merrill Lynch is providing an expanded credit facility to support LinQuest’s continued growth. (Source: BUSINESS WIRE)
06 Nov 19. Ultra Electronics Holdings plc today updates the market on its performance over the nine months to 30 September 2019. As anticipated, there has been good order book development since our Interim results and the Group continues to trade in line with expectations. The ongoing strategic evolution is progressing and there remains good long term opportunities and growth potential for Ultra. Our major markets are growing and our strong technology base is positioning us well on existing and potential future programs.
Capital Markets day
Ultra will host a Capital Markets Day in London on 23 January 2020 to provide a further insight on the Focus; Fix; Grow initiatives and an update on corporate strategy and growth ambitions.
05 Nov 19. James Fisher sinks after cyberattack downs computer systems. External forensic cybersecurity experts were still investigating the full scale of the hacking attack. Fisher said it disconnected its computer systems as a precautionary measure. James Fisher and Sons PLC (LON:FSJ) shares sank on Tuesday afternoon as the marine services provider revealed it had been hit by computer hackers.
The FTSE 250 group said external “forensic” cybersecurity experts were still investigating the full scale of the “cyber security incident”, which involved a hack on its computer systems.
After its immediate response of calling in external help, Fisher & Sons said it disconnected “all affected systems” from the internet as a precautionary measure, which “has restricted access to communication and financial systems”.
Judging that it has contained the incident, the company said it was working with the cybersecurity providers on “a safe recovery of systems, applications and data” from the disaster recovery back-up.
“Work is ongoing to complete the recovery as quickly as possible and to minimise any impact on our businesses,” the company said.
Share were down 5% to 1,908p shortly after. (Source: proactiveinvestors.co.uk)
05 Nov 19. UK government delays Cobham sale decision. The UK Government’s Business Secretary Andrea Leadsom has delayed a decision on whether the £4bn sale of British defence and aerospace company Cobham to Advent International can go ahead. The deal, approved by Cobham’s board in July, has been on pause after the Government raised concerns about the potential sale on grounds of national security.
In a written ministerial statement submitted to parliament today, Leadsom confirmed she had received a report into the deal from the Competitions and Markets Authority (CMA) and revealed that Defence Secretary Ben Wallace had raised concerns over the sale with Leadsom.
The statement reads: “The Secretary of State for Defence has also written to me about the national security implications of the merger and the discussions which have taken place with the parties to propose undertakings to address those implications. I am grateful for the advice I have received and the constructive engagement from the parties.”
Leadsom added: “The decision on how to proceed in this case requires further full and proper consideration of the issues. Having received these reports, I will, therefore, have further discussions with my ministerial colleagues and the parties to the transaction to inform the decision-making process.”
The statement does not provide a timeframe for when a decision could be expected however Leadsom said the legal process will continue during the general election period.
In September, Leadsom announced an investigation into the sale saying: “Following careful consideration of the proposed takeover of Cobham, I have issued an intervention notice on the grounds of national security.
“As part of the statutory process, the Competition and Markets Authority (CMA) will now investigate and carry out a review on the national security implications of the transaction. They must report back to me by 29 October 2019.”
Leadsom blocked the deal under the Enterprise Act 2002 which gives the British Government the power to intervene in mergers on ‘public interest grounds relating to national security’.
Cobham’s share price immediately dropped by 2% after the statement was released. (Source: airforce-technology.com)
05 Nov 19. Crown Prince of Abu Dhabi unveils one of Middle East’s biggest defence groups. EDGE integrates more than 25 government-owned and independent entities and will employ more than 12,000 people.
A new defence conglomerate for researching and developing advanced technology for weapons systems, cyber defence and electronic warfare was announced in Abu Dhabi on Tuesday, combining more than 25 government-owned and independent companies.
EDGE, inaugurated by Sheikh Mohamed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, will partner with world-leading industry-equipment manufacturers and defence contractors to accelerate innovation to protect against cyber attacks, drones, the spread of misinformation and other emerging threats to national security in the UAE and abroad.
“The solution to address hybrid warfare lies at the convergence of innovations from the commercial world and the military industry,” said Faisal Al Bannai, chief executive and managing director of EDGE.
Technology has rapidly transformed the modern battlefield. Two drone attacks on Saudi Aramco production facilities in Saudi Arabia in September pulled more than half of the world’s largest crude exporter’s production offline.
“Established with a core mandate to disrupt an antiquated military industry generally stifled by red tape, EDGE is set to bring products to market faster and at more cost-effective price points,” he said.
With persistent geopolitical tensions, demand for military equipment is increasing defence spending worldwide. But R&D spending in the aerospace and defence sector has lagged behind other technology-intensive industries like health care and electronics, and is dominated by the US, which accounted for more than half of the $22.1bn (Dh81.17bn) invested in R&D in aerospace and defence last year, according to professional services company Strategy&.
These two factors – relatively small R&D investment and one dominant global player – mean there are massive opportunities for growth and innovation in the sector, with the Middle East a key region to contribute to the industry’s performance in the near-term, according to Deloitte, alongside China, India, France, Japan and the UK.
The first phase of EDGE’s formation will bring together government-owned Emirates Defence Industries Company, Emirates Advanced Investments Group and Tawazun Holding, among 22 other companies, and employ more than 12,000 people.
New chief executive Mr Al Bannai, formerly a managing director at UAE cybersecurity company DarkMatter, was tapped for the role “based on his start-up background and proven track record in leveraging emerging technologies to expand business opportunities at home and abroad”, according to EDGE.
The new company will focus on autonomous devices like drones, the Internet of Things, advanced propulsion systems, robotics and smart materials, as well as artificial intelligence.
“EDGE will help us transform our domestic capabilities while growing our engagements on defence and security exports,” said Tareq Al Hosani, chief executive of Tawazun Economic Council.
The launch event was held at the St Regis Saadiyat Island Resort.(Source: Google/https://www.thenational.ae/)
05 Nov 19. Thyssenkrupp to invest €250m at shipbuilding division. Thyssenkrupp (TKAG.DE) plans to invest 250m euros (£216m) at its unit that builds submarines and warships, the German industrial conglomerate said on Monday. The investment at Thyssenkrupp Marine Systems (TKMS) will be made by 2023, the group said, pointing to good order intake at the moment. TKMS will also hire 500 new employees by the end of next year, it said.
“Our ambition is to be Europe’s most modern naval company. By making major investments, we are preparing our operations for the future,” TKMS Chief Executive Rolf Wirtz said in a statement.
“Our recent successes show that there is strong demand for our products and services. We want to further strengthen this position,” he added.
The group said it was contracted by an African customer in August to build four frigates.
Order intake at TKMS was down a fifth at 385m euros in the first nine months of the year, while sales were up a third at 1.305bn euros. The unit achieved break even on an adjusted operating profit level following a 117m euro loss last year.
The investment comes days after the group said it would invest a similar amount in a new hot-dip coating facility at its steel division, Steel Europe.
As part of a restructuring, Thyssenkrupp has said it is open to selling a majority of TKMS, Germany’s second-largest defence group after Rheinmetall (RHMG.DE), which has been mentioned as a potential buyer, along with France’s Naval Group. But a TKMS spokesman on Monday said the division was currently not up for sale. (Source: Reuters)
04 Nov 19. Quarterly report results bode well for Kleos Space. ASX-listed Kleos Space has posted a positive Q3 result on the back of success in South America, the launch of a US-based subsidiary and approval for a December 2019 launch for the company’s signature Scouting Mission satellites. In its third quarter update, Kleos said the four satellites of the Scouting Mission would launch aboard a Indian rocket PSLV C49 from the Satish Dhawan Space Centre. The satellites have passed their deployment checks to ensure they will function with PSLV rocket dispensers.
“Our scouting mission satellites are mission ready and we are on track to be able to commence revenue generation in the first quarter of 2020,” said Kleos Space chief executive Andy Bowyer.
“By changing launch providers and orbit, Kleos has increased the frequency of its coverage over crucial shipping regions such as the Strait of Hormuz and the South China Sea.
“Data from these regions is highly valuable to defence and security customers as they are increasingly prone to dark maritime activity.”
The company originally planned to launch on a Rocket Lab rocket from New Zealand. The Scouting Mission comprises four nano-satellites made by Danish satellite manufacturer GomSpace.
Kleos, based in Luxembourg and listed on the Australian Securities Exchange, plans to launch a constellation of 20 satellites providing global monitoring of maritime radio frequencies.
That allows accurate location of vessels in distress, as well as those seeking to avoid attention by not broadcasting automatic identification system (AIS) signals, the maritime version of aircraft transponder identification systems.
Government agencies can use that information to enhance border and maritime security and safety. It’s also of great interest to port operators and now the insurance sector.
During the third quarter, Kleos received three new commercial pre-orders for its maritime geo-location data-as-a-service products from South American data integrators.
The company said it secured $3.3m funding through the issue of convertible notes. It plans to use that funding to accelerate business development and revenue generating activities, including hiring additional sales and support professionals.
Kleos has made significant progress in accessing the US market. Following a competitive process, the company was awarded a contract to participate in the US Air Force Space Vehicle Directorate’s Catalyst Space Accelerator program.
That’s a 12-week program to lift USAF awareness and rapid acquisition of commercial dual-use space technology. Kleos was also awarded a USAF Small Business Innovation Research contract. To further its US business, Kleos formed a wholly owned US subsidiary, Kleos Space Inc, to access US funding and projects that are restricted to US entities. (Source: Space Connect)
04 Nov 19. SAS turnaround on the back of new agreements and better finances. Australian space company Sky and Space Global (SAS) said it has been a challenging but productive quarter, with finances improving and progress made on its business plan. In its third quarter update to the Australian Securities Exchange (ASX), SAS said it had focused on signing further reseller agreements to deepen its potential sales. It’s continuing to work on building a pipeline of commercial contracts as it advances towards the commercial delivery of its global nanosatellite constellation. SAS said it is continuing to work towards finalising its refinancing and corporate restructure.
SAS incorporated in the UK in 2015 and listed on the ASX in May 2016.
The company is based in Perth and is well advanced in plans for what it calls the Pearls constellation of as many as 200 nanosatellites in equatorial orbit, providing low-cost communications, data and internet services for markets in Africa, South America and Asia.
SAS is proposing an additional satellite constellation, allowing full global coverage, including Australia, Russia, China, South Africa, Argentina and Canada. The company has more than 50 agreements in place for use of its services. In 2017, SAS Global launched three prototype satellites on an Indian rocket to test its technology.
SAS has experienced its fair share of problems, particularly attaining the cash needed to advance its operations.
It’s expecting to see initial space revenues in fourth quarter 2020, following launch of first commercial satellites and the roll-out of ground terminals.
The report said it had embarked on a series of activities in third quarter to grow sales opportunities to underpin strategic expansion from equatorial to global constellation coverage for its nanosatellite program.
One new reseller agreement is with D2U Network Solutions, a value-added distributor specialising in IoT and data management that will help promote SAS’ solutions in Oceania and the Pacific islands through established distribution channels such as carriers, internet service providers, wireless integrators and enterprise partners.
The second is with Mexico-based provider RED52, which will see both companies collaborate on providing IoT connectivity for various projects in Costa Rica and Panama for potential customers across the resources and banking sectors.
SAS’ financial position is improving. In September, SAS secured a US$550,000 short-term convertible loan agreement between its UK subsidiary and third-party finance provider CSS Alpha (BVI) Limited.
In October 2019, SAS received £1,425,382 ($2.6m) from the UK tax authority, HMRC, in relation to a R&D tax claim submitted by SAS’ UK subsidiary.
“These funds provide Sky and Space with additional working capital for its near-term commercial objectives,” SAS said.
The company is also in talks with the European Space Agency (ESA) about a possible partnership agreement. ESA invited SAS representatives to speak at the UK Space conference in Newport.
That focused on companies developing space-enabled seamless 5G connectivity networks to develop ubiquitous services.
“The company and ESA are in a continuous discussion to further explore such partnership agreement, which, subject to the support of UK delegation to ESA, could provide coalition-funding for the company development and deployment effort,” it said. (Source: Space Connect)
01 Nov 19. Mitsubishi, Kawasaki see defence orders decline. Japan’s biggest defence contractors – Mitsubishi Heavy Industries (MHI) and Kawasaki Heavy Industries (KHI) – have posted half-year profit gains against a backdrop of falling orders for defence equipment. MHI said on 31 October that group revenues in the first six months of fiscal year 2019 increased marginally year-on-year to JPY1.87trn (USD17.3bn), while its profit from business activities climbed 24% to JPY74.3bn. KHI’s revenue in the period was JPY736.5bn, an increase of 7%, and its operating profit climbed 3% to JPY8.6bn. MHI’s Aircraft, Defense, & Space (ADS) division registered revenue of JPY310.5bn, a 1% increase, while profit was JPY12.6bn compared to a loss of JPY22.1 bn in the first half of 2018. (Source: IHS Jane’s)
01 Nov 19. FocalSpec joins LMI Technologies group. Finnish technology company FocalSpec has been acquired by TKH Group NV, a Dutch listed technology company. FocalSpec will join the LMI Technologies group, owned by TKH and strengthen further its position in inline metrology.
FocalSpec is a global pioneer in designing and manufacturing high-precision, high-speed optical sensors. Their unique and patented Line Confocal Imaging (LCI) technology is used in diverse, demanding quality assurance applications e.g. in electronics industry. FocalSpec was founded in 2009 as a spin-off from VTT, the National Technical Research Institute of Finland and is
headquartered in Oulu, Finland. Apart from VTT Ventures, the company owners included Nordic Option, Veritas Pension Insurance, Sauli Törmälä as well as several other private investors.
During 2019, FocalSpec made a breakthrough in mobile device manufacturing. The most important customers of FocalSpec today are system integrators providing QA functionality for the production lines of the world’s leading mobile device manufacturers.
To strengthen the resources required to sustain and continue the high growth of the business operations, FocalSpec has yesterday accepted the purchase offer of TKH Group NV for the entire capital stock of FocalSpec Oy. TKH Group is a Dutch listed technology company focused on high-end innovative technologies in high growth markets within three business segments: Telecom, Building and Industrial Solutions. TKH Group operates on a global scale, with growth concentrated in Europe, North America and Asia. Employing 6,533 people, TKH achieved a turnover of € 1.6bn in 2018.
With this acquisition, TKH Group expands its vision technology with industry-leading confocal technology that solves applications in markets such as consumer electronics, battery, pharma, semiconductor and medical. FocalSpec will join the LMI Technologies group and operate under the LMI brand – a global leader in 3D inline scanning and inspection.
“Line confocal sensors offer a leap in technological performance for scanning opaque, transparent and curved materials, such as hybrid glass assemblies common in cell phone manufacturing. By combining this game-changing optical approach with our proven Gocator inspection software and volume manufacturing know-how, customers will be able to solve challenging inline metrology applications at a price/performance and ease of use never seen in the market today”, said Terry Arden, CEO, LMI Technologies.
Sauli Törmälä, Chairman of FocalSpec: “The addition of LCI technology to the 3D product portfolio of LMI Technologies builds a highly complementary set of solutions for metrology applications in critical assembly processes. Along with their leading inspection software, we believe FocalSpec and LMI will be a true powerhouse of metrology in the years to come and look forward to joining forces.”
The FocalSpec unit in Oulu, Finland will act as the LMI competence center for the LCI technology globally and the current activities will continue, focused on product development and operations. The development work will gain additional resources and platforms from the LMI Group’s existing metrology operations. FocalSpec’s sales organization will be strengthened considerably as the products will get access to the LMI Group’s extensive sales network globally.
01 Nov 19. Chemring (CHG) announced in a year-end trading update that the defence engineer had outperformed its own expectations for adjusted operating profit, sending shares up in early trading. It has also secured an order for a further 75 Aerosol and Vapor Chemical Agent Detector units from the US Department of Defense, which it expects to deliver in Chemring’s 2020 financial year. (Source: Investors Chronicle)
31 Oct 19. Disappointing Financials for Intelsat, Plus, Musk Years Ahead of Bezos in the Satellite Race. Chris Forrester has posted at Advanced Television that Intelsat released its Q3 financial numbers and reported revenues of $506.7m (€457.2m), down 6 percent with a net loss of $148.3m.
CEO Steve Spengler said that Intelsat was experiencing “improving trends with respect to new business for wireless infrastructure on several continents.”
Contracted backlog as of September 30th was $7.2bn, as compared to $7.5bn on June 30th, reflecting a $60m reduction related to reduced revenue expectations from a certain media customer in Europe and an early termination of a managed service for a North America media customer.
Intelsat reminded investors of the successful launch of their I-39 craft, which entered service on October 14th. Anchor customers include the Myanmar Ministry of Transport and Communications, for which Intelsat 39 provides a major source of domestic broadband Infrastructure.
A statement from Intelsat read, “On October 9, 2019, Northrop Grumman’s in-space servicing vehicle, Mission Extension Vehicle 1, or MEV-1, successfully launched, and it is now headed towards a rendezvous and docking with the Intelsat 901 satellite. MEV-1 is designed to extend the life of deployed satellites where the existing technology is still viable for the applications served. Because it defers the need to deploy new satellites, MEV-1 will enable Intelsat to redeploy capital into other areas of our business and optimize our capital expenditures for future innovation. With the first phase of the mission complete, Intelsat and Northrop Grumman say they now shift their focus to the most critical parts of the mission—rendezvous and docking—which are expected to occur over the next three months.”
Chris also posted that there are almost a dozen rivals looking to capitalize on satellite-to-broadband services, including existing players Viasat, O3b, Eutelsat Konnect and Charlie Ergen’s Hughes/Echostar. Two extremely aggressive new players are Elon Musk and his firm’s Starlink system (a subsidiary of Musk’s SpaceX business), and Jeff Bezos’ Project Kuiper. Other players include O3b, OneWeb and Canadian Telesat.
Musk’s President and COO of his Starlink system, Gwynne Shotwell, speaking at a Baron Funds’ investment event in New York, told Baron CEO Ron Baron that Bezos was “years behind” in getting his constellation into orbit.
She criticized Bezos’ wealth and said that the project’s ‘free money’ was a hindrance, not a help, and that engineers do better when they are pushed harder over a tight period of time with very few resources at hand.
Shotwell also had a few barbs for her rivals at OneWeb, saying that the SoftBank-backed enterprise would be expensive. “So, if you’re thinking about investing in OneWeb, I would recommend strongly against it. They fooled some people” who will be “pretty disappointed in the near term.”
Starlink is due to start services in 2020, and the U.S. Air Force is already testing reception and transmissions on Starlink’s existing 60 satellite mini-fleet. Musk will be adding to launches this year and throughout 2020. (Source: Satnews)
30 Oct 19. EchoStar Acquires Helios Wire Corporation into their Fold. EchoStar Global L.L.C., a subsidiary of EchoStar Corporation (NASDAQ:SATS) (“EchoStar”), has acquired Helios Wire Corporation (“Helios”), a satellite-enabled IoT connectivity company headquartered in Vancouver, Canada — the acquisition includes Helios’ Australian subsidiaries Sirion Holdings Pty Ltd. and Sirion Global Pty Ltd. (“Sirion Global”).
Sirion Global holds global spectrum rights for S-band Mobile Satellite Service (MSS), administered by Australia, and has been working to develop solutions for high volume asset tracking and monitoring applications by satellite. The acquisition occurred by way of a court approved plan of arrangement under the Business Corporations Act (British Columbia).
Anders Johnson, Chief Strategy Officer, EchoStar, noted that this acquisition advances the company’s strategy and further lays the foundation for a global S-band solution for the future. EchoStar’s aim is to develop S-band technologies that will dramatically reduce the cost of satellite IoT, including Machine-to-Machine (M2M) communications, public protection and disaster relief (PPDR) and other end-to-end services worldwide. Over time, EchoStar products and services will be integrated into the new global, hybrid networks that leverage multiple satellites and terrestrial technologies. This acquisition of Helios and Sirion Global positions us closer to realizing that vision.
Raghu Das, Co-Founder and COO, Helios, said the firm’s shareholders are pleased to have concluded the sale of Helios and the Sirion subsidiaries to EchoStar, which has a wealth of S-band experience in the United States and Europe and is the perfect operator to take this project forward and accelerate the build-out of the Sirion constellation and deployment of global IoT services. (Source: Satnews)
04 Nov 19. Pennant’s growth back on track. Chief executive Phil Walker of Pennant (PEN:84p), an Aim-traded supplier of products and services that train and assist engineers in the defence and civilian sectors, was pretty confident that his company would deliver a strong rebound in profits in the second half when I interviewed him at the time of the half-year results (‘Pennant on track for strong second-half profit recovery’, 24 Sep 2019).
True, contract delays and timing of revenue recognition on major work programmes led to a pre-tax loss of £1.8m for the first six months of 2019 on revenue down 45 per cent to £7.25m. However, Pennant has £12.75m of work slated for delivery in the second half of this year, which analysts estimate will produce a pre-tax profit of £3.6m. Bearing this in mind, £7m of that second-half revenue figure is set to come from a contract to supply training aids in the Middle East. Therefore, it’s reassuring that the directors confirmed that all four training devices achieved acceptance for Pennant’s Qatar programme, thus enabling the associated revenue and profit to be recognised in the current financial year, and two further devices are on schedule for acceptance testing in December 2019.
Furthermore, Pennant has been awarded a major new contract by a UK original equipment manufacturer (OEM) valued at £3.4m for the design and build of a helicopter maintenance training aid to enable UK military training on ‘anti-surface’ weapons systems. The contract is an engineered-to-order programme, whereby revenue will be recognised on a ‘percentage of cost completed’ basis, as the programme runs across 2020 and 2021, with final acceptance due in the fourth quarter of 2021.
This takes Pennant’s total order book up to £40m, a figure that excludes a significant contingent contract (worth £28m in revenue over three years, according to Mr Walker) for the design, build and delivery of training equipment to the Ministry of Defence (MoD). Pennant was down-selected as supplier of training solutions by the US prime contractor in 2018, but the contract start date was pushed back to 30 June 2020, a contributory factor in the first-half loss as Pennant was carrying an additional £1m costs in preparation of work commencing.
It’s worth noting, then, that Pennant has achieved £430,000 of annualised operational cost savings, and is aiming to make a further £170,000 in savings, all of which will be seen in the 2020 budget. Factoring in these cost savings, and a budgeted record contribution of £6.6m of revenue from Pennant’s integrated logistic support (ILS) division, WH Ireland is predicting Pennant will produce 2020 revenue of £22.3m, pre-tax profit of £3m and earnings per share of 7.7p. The contribution from ILS reflects valuable long-term contracts with the Canadian and Australian defence departments to use Pennant’s Oracle-based software product that reduces the support cost of major capital equipment.
Taking into account the latest contract win, Pennant’s contracted order book now covers around 60 per cent of next year’s revenue budget. However, if Pennant lands a £5m contract to supply trading aids to a new academy in Saudi Arabia that is scheduled to open in September 2020 – the prime contractor is a longstanding partner of Pennant – and three other smaller government contracts worth £2m that were deferred until 2020 due to budgetary issues, then order book cover rises above 90 per cent, thus derisking 2020 forecasts even further. Also, the £3.6m of revenue that Pennant expects to earn in 2020 from a contract to provide electro-mechanical trainers and computer-based training for the Ajax fighting vehicles to the British Army doesn’t factor in a likely [multi-million pound] increase in its overall value in light of the contract’s rescoping.
Pennant’s shares have rallied since September’s interim results, but still only trade on a 2020 price/earnings (PE) ratio of 11. That’s a modest rating and one that offers 50 per cent plus upside to my short-term target price of 130p, and even higher still if work on the aforementioned delayed contingent contract starts next year as planned. On a bid-offer spread of 82p to 86p, I rate the shares a buy. (Source: Investors Chronicle)