By Giulia Segreti
ROME (Reuters) -Italy’s Leonardo aims to play a central role in the expansion of the European defence sector, its chief executive said on Tuesday, strengthening its technological profile and growing in space and cybersecurity in the next five years.
The state-controlled group is looking to capitalise on increased defence spending following the Russian invasion of Ukraine two years ago and ride an acceleration in cross-border consolidation in Europe.
“The world geopolitical scenario calls for a new global security paradigm, where we aim to play a proactive role in the evolution of the European defence sector,” Chief Executive Roberto Cingolani said in a statement.
Defence spending in EU countries that are part of NATO is seen increasing on average 4.5% yearly between 2023 and 2028, the group estimated in slides for its industrial plan.
In the same period, cyber security spending is expected to grow on average 8.8% each year and space 7.6% yearly.
After shrinking for decades, European military budgets are on the rise triggered by increasing geopolitical tensions worldwide. This has lifted military stocks and is set to increase operating margins at defence groups.
Presenting its 2024-2028 industrial plan, Leonardo said it would strengthen its core businesses – helicopters, electronics and aircraft – while investing in digitalisation and artificial intelligence and leveraging opportunities in cybersecurity and space.
Shares in Leonardo rose as much as 6.8% on Tuesday morning as analysts welcomed 2024 guidance above expectations and an industrial plan exceeding consensus estimates
The group’s Milan-listed shares are up some 40% so far this year and over 80% in the last 12 months.
“There are still margins for growth, the company’s market capitalisation is still low,” Cingolani said, answering a question on the share price rise.
POTENTIAL BOOST FROM M&A
A former government minister who became CEO last May, Cingolani has been pushing for alliances with other defence groups in Europe.
At a time when European defence companies seem prepared for a new wave of mergers, Leonardo said growth through M&A, not included in the plan, would further boost the group, with “the expansion of the alliance policy and possible targeted bolt-on transactions in specific areas with high margins”.
As warfare changes, with traditional weapons combined with digital technologies and applications, Cingolani, a scientist by background, is steering the group with the “bullets and bytes” mantra in mind, pushing a focus on AI-powered interconnected platforms.
Orders would grow on average 4% yearly to just under 23 billion euros in 2028, with some 87% of the total order portfolio related to cyber and secure digital platforms, the company said.
Revenues will rise by an average of 6% yearly in the 2024-2028 period, reaching 95 billion euros, while core profits should reach 2.5 billion euros, up from the 1.44 billion euros expected at the end of this year.
Free operating cash flow is seen almost doubling from 0.7 billion euros at the end of this year to 1.35 billion by end-2028.
Digitalisation, rationalisation of the group’s products and group-wide efficiencies would yield gross savings of 1.8 billion euros over the period, it said. ($1 = 0.9149 euros)
(Additional reporting by Romolo Tosiani,editing by Gavin Jones and Keith Weir)
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