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Where money flows, corporate action follows. The sea change in European military spending has given rise to piecemeal acquisitions, joint ventures and fundraisings as companies attempt to trade and share capabilities. So far, the action has largely been focused on land and air equipment. But there are signs that activity in the maritime sector is hotting up.
The latest example is Thyssenkrupp’s spin-off of its marine division, whose maiden voyage on Monday proved a remarkable success. Shares in the German conglomerate’s submarine and ship-making unit, ended the day at €81.10, valuing Thyssenkrupp Marine Services’ equity at €5.15bn.
The carve-out — which leaves Thyssenkrupp as the majority shareholder with 51 per cent — enables the embattled steel conglomerate to take advantage of a propitious moment. Europe’s defence index has trebled since February 2022. Even assuming, boldly, that ongoing wars come to an end, Europe has to make up for decades of under-investment in fleets, tanks and other military kit.
TKMS sees its “attainable” market doubling to €61bn by 2033, based on proposed government spending on ships, submarines and associated technology.
True, there are others competing for those euros and dollars. TKMS knows as much, having recently lost out to Japan’s Mitsubishi Heavy Industries for an order to build a fleet of Australian frigates, worth up to A$10bn ($6.5bn) in its first phase. But the company is well positioned, especially given its integrated offering comprising vessels above and below the sea, along with sonar and sensor systems.
This is borne out by TKMS’s €18.6bn order book; sure, this is for massive bits of kit that can take six years to build, but that number equates to 10 times 2022 sales. Consensus sees revenue rising by 50 per cent to 2033. Operating margins meantime have been lifted to more than 5 per cent and the group is guiding for this to rise to 7 per cent over the medium-term.
Consolidation is a deeper undercurrent in the industry. Naval defence is a fragmented market. Flagships include Italy’s Fincantieri, Europe’s largest shipbuilder, which last year bought defence group Leonardo’s submarine unit, Wass. Germany’s Rheinmetall last month stepped into the waters with a deal to buy privately owned Naval Vessels Lürssen; the tank and munitions maker wants to build “a naval powerhouse” in Germany.
That leaves the question open as to whether TKMS might — in future — buy or be bought. Thyssenkrupp has so far declined to participate: political vacillations last year stymied a proposed acquisition by US private equity firm Carlyle after lengthy talks.
Meanwhile, the unit’s strong standalone prospects are sufficient cheer for its parent. The day one performance of the demerged entity already gives it an equity value far above the €2bn-€4bn analysts had been pencilling in to their valuations of Thyssenkrupp. Yet with TKMS trading on 45 times this year’s estimated earnings — a 13 per cent discount to similarly-growing rival Fincantieri on S&P Capital IQ estimates — there is fuel in the tank yet.
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