Top-Pick Off But Still On Board

Research evidence excerpt

Top-Pick Off But Still On Board

IdeaMbetween now and Q2 earnings. To reflect today’s developments, and our view that

the stock is unlikely to attract renewed investor momentum until there is more

clarity on at least the Boxer contract in Q3/Q4, we remove Rheinmetall as a Top

Pick. However, we believe the sell-off is overdone. The stock is currently trading at

10.6x, below the 11.1x average over 2016-2021, which suggests that the majority of

the risks are already priced in, in our view. We therefore remain OW.

We cut our PT by 30% to €1,750 to reflect German uncertainties in our

estimates, WACC and multiples. In addition to removing Rheinmetall as Top-Pick,

we adjust our estimates and valuation assumption. We cut our group EPS 2030 by

2% to reflect F126 cancellation, increase the WACC to 8.9% (vs 7.5% previously)

assuming higher risk on the German procurement, decrease our growth rate in

2030-35 from 8% on average to 6% in our DCF and lower our multiples by 25%

(15.0x EV/EBIT and 18.6x PE on 2028), which is a ~5% discount compared to peers. It

translates into a new PT of €1,750 (vs €2,500 previously), supporting our

maintained OW-rating.

What happened? Hit to confidence. As highlighted in our note this morning,

Germany cancelled the €12.8bn F126 frigate programme, originally intended to

deliver six large multipurpose warships. Based on BMVg release sent by the

company, the decision was made due to major delays, cost overruns and the risks/

costs linked to changing the main contractor. Indeed, the change of main contractor

to NVL was reviewed, but this would have pushed the cost of six F126 frigates to >

€18bn, including a negotiated €15.2bn contract with NVL as well as work already

completed and support/supply contracts. Another important factor is that changing