RBC initiates U.K. defense, security technology companies

Investing.com -- RBC Capital Markets has initiated coverage on multiple U.K.-listed defense and security technology companies, including Cohort (LON:CHRT), Chemring (LON:CHG), and Qinetiq Group (LON:QQ).

Cohort was rated Outperform, supported by its record £650 million order book and strong exposure to naval defense systems, including the Royal Navy’s Ancilia System and submarine sonar contracts with Italy and Australia.

RBC expects the recent acquisition of EM Solutions to boost margins and open new market opportunities in Australia.

The brokerage’s analysts forecast Cohort to deliver a 16% adjusted earnings per share (EPS) compound annual growth rate (CAGR) between fiscal year 2024 (FY24) and FY27.

They believe earnings upgrades could “stem from order wins, incremental M&A and a quicker margin step-up in the underlying group.”

Chemring also received an Outperform rating, driven by its strategic role as one of the few Western producers of high-explosives.

RBC views the company as well-placed to benefit from NATO’s multi-year rearmament cycle, particularly through its Norwegian facility Chemring Nobel, which is ramping up capacity by 275% by 2028.

The group’s record £1.25 billion order book and planned sales growth to £850 million by FY30 underline the long-term runway.

“Chemring offers exposure to a structural multi-year NATO rearmament cycle via its Energetics businesses,” analyst Ben Pfannes-Varrow wrote.

The company’s defense-focused Roke division, while facing near-term order cover risks, is expected to recover as the U.K. Strategic Defence Review concludes, though some risks could remain.

Meanwhile, RBC initiated coverage of QinetiQ at Sector Perform following a March profit warning tied to order delays in the U.S. and U.K., which led to a reset in earnings expectations.

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The brokerage highlighted that while the group maintains strong government ties and long-term contracts, recent setbacks—including a £140 million goodwill impairment on U.S. operations—have dented investor confidence.

“Expectations have been reset, but trust needs to be rebuilt through continued delivery,” Pfannes-Varrow said in a separate note. The outlook for its U.S. segment remains uncertain despite recent contract wins.

Overall, RBC sees all three companies as well-positioned to benefit from rising NATO defense spending, which could more than double by 2030 if targets rise to 3.5% of GDP.

Among them, Cohort and Chemring are viewed as having the clearest valuation upside, underpinned by record order books and strong potential for earnings upgrades.

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