The spoils of war: Renk IPO to test appetite for defence stocks in the shadow of Ukraine

Data InsightECM Pulse 20 September

The spoils of war: Renk IPO to test appetite for defence stocks in the shadow of Ukraine

European IPOs are back in full swing and there are few deals more topical than the IPO of German defence contractor Renk. With the lingering struggle for Ukraine in the backdrop, some investors still see arms-related stocks as an anathema, regardless of how virtuous those wielding them are.

These ESG battle lines are hardening. An investment in Renk’s IPO, best known for its gearboxes for tanks, does not meet ESG criteria, argued two ECM investors speaking to this news service.

A third though had no such concerns. Renk is an IPO he is interested in given its attractive margins and the strength of its underlying sector. “Defence is becoming more relevant,” he said, pointing to German peer Hensoldt [ETR:HAG] as a good listed comparable.

Renk is ambitious about the possibility of M&A, as well as spending more on research and development, according to a source close to the deal. He added that since the war in Ukraine began, defence has become a focus for European investors.

It is also particularly important for Germany, given recent pledges to Ukraine alongside increased spending on its own military as part of its NATO commitments, a boon for the defence stocks as flagged by the ECM Pulse earlier this year. 

“It is undeniable that the current situation is making defence a big focus, especially when Europe is way less organised in this sense than the US,” the source said. “We can be as naïve as we want, but the defence sector is going to attract a lot of funding, and this is a key player in the industry with a strong sponsor in Triton.”

Some investors will not be able to take part in the deal, a second source close conceded, making the listing less straightforward than fellow German IPO candidate Schott Pharma, for example.

But for equity investors that can participate, a renewed European focus on defence may whet the appetite for Renk.

Surging peers boost valuation hopes

Triton reportedly wants at least EUR 2.5bn for the company at IPO, a premium to the EUR 700m it paid when it purchased 76% of the company from Volkswagen [ETR:VOW3] in 2020, although that is likely to drop when baking in a discount, said a third source close to the deal.

While initially this might seem ambitious, the performance of other German defence stocks since the start of the war could support such a valuation. Hensoldt and German tank manufacturer Rheinmettal [ETR:RHM] have seen their share prices soar over 150% and 170% since Russia invaded Ukraine.

Renk reported revenues of EUR 849m, with an adjusted EBIT of EUR 144.3m, and adjusted EBIT margins of 17%, according to IPO documentation.

Hensoldt had a 2022 EV/EBIT ratio of 20x while Rheinmetall had a multiple of 15.6x; the average of the two 17.8x, according to data provided by Fidessa and compiled by Factset.

Based on the average 17.8x EV/EBIT multiple, Renk could have a fair value of around EUR 2.6bn, according to predictive analytics by this news service. If matched to Hensoldt, the closest peer according to the first investor, which had sales of EUR 1.85bn and EBIT of EUR 174m, RENK would be valued at EUR 2.9bn.

The syndicate is hoping for a price tag in line with Hensoldt, which might translate to an IPO valuation of around EUR 2bn once an IPO discount has been factored in, in line with the roughly 30% discount investors have been asking for on European IPOs, according to the third source.

At 17%, Renk’s EBIT margin in 2022 was also higher than Hensoldt’s 10.2%, meaning Triton might even be able to shoot for more, should investors value it at a premium.

“There is a lot of enthusiasm about the fundamentals of the company and its margins,” said the first source close. “There is a big backlog of orders and long-term investments from customers, which gives them certainty over the next few years.

Europe back in business

Alongside Renk and Schott Pharma, French software publisher Planisware published an intention to float yesterday, May 19, as predicted by this news service last week.

With three significant deals in front of investors, Europe is gearing up for the final push of the IPO year.

Fellow German companies DKV Mobility and bus operator Flix, alongside Portuguese hospital group Luz Saude, may also join the fledgling pipe, as previously reported.

“On a general note, ever since I’ve been back from the holidays, I found the attitude of investors as positive and constructive,” said an ECM banker, adding that improving equities performance in general was pushing investors to be more open about chipping into IPO.

With IPO volumes muted so far, a final positive flurry would set the tone for a better 2024.

Triton declined to respond to this piece, and Renk did not respond to requests for comment.

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