Thales and Saab ratings boosted at UBS on "defence supercycle" 

Investing.com -- Thales (EPA:TCFP) and Saab have received an upgrade to "buy" from UBS Global Research, reflecting growing investor confidence in European defence stocks amid what analysts describe as a "defence supercycle." 

The move comes as European governments ramp up military spending in response to heightened geopolitical tensions, particularly the ongoing war in Ukraine and broader security concerns.

UBS analysts see a paradigm shift in the defence sector, with European NATO members expected to increase defence spending to 2.7% of GDP by 2030, rising further to 3.3% by 2035.

“We now assume 2.7% of GDP is spent on defence in Europe in 2030, rising to 3.3% in 2035, resulting in increases in estimates across the space,” UBS states. 

This trajectory is expected to favour European players over their American counterparts, as leaders push for greater self-reliance in military procurement.

Thales, a leader in electronic warfare and integrated defence communications, is well-positioned to benefit from this shift. 

UBS analysts project a 12.6% compound annual growth rate in sales for Thales from 2023 to 2030, outpacing management’s guidance of 6-7%. 

“Thales is well positioned for the defence supercycle in our view, given its primary exposure to electronic systems and integrated communications where we believe an increasing share of equipment spending will be allocated,” the analysts said. UBS has set a price target of €330 for Thales, up from €160.

Saab, Sweden’s leading defence contractor, also sees an upgrade on expectations that it will secure a larger share of European military contracts following Sweden’s NATO accession. 

“We view Saab as well positioned to support customer investments in defence from a number of angles. Its portfolio in Ground Combat is well positioned as customers look to increase munitions and other consumable inventories in the near term, and its Surveillance portfolio is well positioned for medium and long-term investments in Electronic Warfare capabilities including air defence,” UBS analysts explain. 

The company’s price target is now SEK 525 per share, up from SEK 250, with an expected 25% CAGR in earnings through 2030.

UBS expects European defence firms to take market share from their American counterparts as governments prioritise domestic production. 

“We, and we believe investors, anticipate European defence players taking share from American competitors in Europe. European & Canadian leaders are increasingly echoing French calls for defence spending to be spent within Europe,” UBS notes. 

While U.S. defence contractors will continue to play a role, the shifting procurement landscape suggests a growing preference for European-made equipment, particularly in electronic warfare, munitions production, and battlefield systems.

The upgrades for Thales and Saab also reflect a broader recalibration in investor attitudes towards defence stocks. 

UBS notes that the sector has historically been undervalued due to ESG concerns, but the urgency of European security requirements is driving a reassessment.

“We remove the ESG cost of equity premium from 1.75% previously in valuations, reflecting changing investor perceptions of the sector,” UBS adds, further supporting higher price targets across the sector.

UBS maintains a bullish outlook on the European defence sector, with Rheinmetall (ETR:RHMG) and BAE Systems (LON:BAES) also among its top picks.