Bittium: A renaissance in European defense ahead

Automatic translation: Originally published in Finnish on March 26th, 2025 at 8:00 AM EET. Please note that the automatic translation currently only covers the text visible here and may contain errors. You can provide feedback on the translations here.

We are raising Bittium's target price to EUR 7.8 (previously EUR 6.8) as European defense spending is likely to rise to a new level in the coming years. This significantly improves Bittium's long-term outlook and supports estimates, but tactical communication systems are so-called strategic investments and procurement processes are usually lengthy. In our view, the short-term earnings growth outlook remains largely unchanged, and with the estimates for the coming years, the share is already stretched high, but even one major win could change the situation. We reiterate our Reduce recommendation due to an unsatisfactory risk/reward ratio.

Germany's plans are levelling up the European defense industry

The outlook for the European defense industry market has improved significantly in recent weeks, as Germany announced a large, long-term investment programme in defense. Germany's defense budget has been close to 1% of GDP in the 2000s. After Russia's large-scale war of aggression, the level was committed to be raised to 2% (the level recommended by NATO for member states), but development has been slow so far. In the new guidelines, Germany's defense budget may rise to as high as 3.5%, and in a good scenario, other countries will follow suit. There is significant uncertainty associated with the final level, and the wheels of bureaucracy within the European Union must turn faster than normal in order for the level correction to be made. Underlying this is the geopolitical situation in which the durability of the protective wall previously offered by the United States has begun to be questioned under Trump's administration. The war in Ukraine and the possible withdrawal of US support make the situation extremely urgent, which would change the security situation throughout Europe. Merz, who is set to become the German Chancellor, seems to be taking a leading role in building Europe's own defense and the defense industry, while the previous Chancellor Scholz seemed to be hindering the process.

Bittium's long-term outlook is improving, but tactical communication reforms take time

For the European defense industry, this development means a renaissance, which will most benefit the industry's large companies such as Rheinmetall, Airbus, Saab and possibly BAE Systems. In the short term, demand is expected to focus on rapidly deployable "consumables" (such as ammunition, missiles and weapons), which are already sorely needed in Ukraine. In the longer term, larger budgets and presumably growing armies will need the tactical communication systems and products offered by Bittium, but these are strategic procurements and their procurement processes are traditionally long. Bittium's main competitors are European, and in addition to Bittium, the ESSOR project includes Rohde & Schwarz (Germany), Thales (France), Leonardo (Italy), Indra (Spain) and Radmor (Poland). So there is a lot of competition, even when we exclude US (such as L3Harris) and Israeli (such as Elbit) companies. Therefore, we can say for now that Bittium's long-term outlook has improved significantly due to Europe's growing budgets and volumes, but this does not significantly change the short-term outlook. At the same time, it should be understood that for a small company like Bittium, even one major new customer would be a major breakthrough in the big picture.

A lot of good news is already priced in

Bittium's share price has risen by about 27% in a month, and at the same time, valuation multiples (2025e P/E 27x and EV/EBIT 25x) have been stretched considerably. We now estimate Bittium's fair value to be EUR 6.0-9.5 per share, where we have raised the upper end due to the improved long-term outlook for defence. The value of the Defense & Security segment (EV ~220 MEUR) now accounts for 79% of our sum-of-the-parts valuation. In our opinion, the value already requires new breakthroughs in the sector, which are very possible in the coming years, but not at all certain. As a result, the stock's risk/reward ratio remains unsatisfactory, although the company has potential for anything.