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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
BAE Systems is the UK’s largest pure play defence company. It develops and manufactures a vast range of land and air based military platforms such as ships and jets, alongside equipment and weapons providing its global customer base, primarily the US and UK governments, with advanced military capability.
The outbreak of the Ukraine war four years ago, and rising strains on old geopolitical alliances, has initiated a defence spending supercycle as governments rush to re-arm. That’s benefiting BAE and other major defence players such as Babcock, Rolls-Royce and Qinetiq. BAE now has an order backlog of £84bn.
But warfare has evolved into a new era of defence technology where the old focus on “heavy metal” has shifted firmly to electronics, technology and AI-based solutions. Armoured vehicles, missiles and explosives are all still needed but technology to support drone management, data and intelligence gathering, analytics, surveillance, information security, enemy detection and disruption has become far more critical.
BAE may be a traditional defence manufacturer of fighter aircraft, but it’s also at the forefront in electronics warfare, offering cutting-edge tech-based systems. Mid-cap Chemring, besides manufacturing artillery and missiles, is active in tech-enabled protection offering cyber defence, detection and countermeasure solutions.
This structural repositioning to electronics and data-based defence systems has paved the way for a wave of orders for niche defence technology specialists such as Cohort and Concurrent Technologies. A key support for these solely tech-focused defence companies is a much faster upgrade cycle.
Concurrent’s military-grade embedded computers and systems — essential for modern defence operations and used in command centres and front lines — are designed to operate reliably in the harshest of environments, whether in space, sea or on land. Its customers include companies such as Boeing, Raytheon, MBDA and BAE Systems.
BUY: Concurrent Technologies (CNC)
Concurrent’s pipeline of business is growing as militaries rush to update their equipment, writes Arthur Sants.
The company designs and manufactures computers that can endure extreme conditions. They are sold to defence contractors and installed in armoured vehicles and aircraft. Radar is a strong driver of demand and the Ukraine war is increasing the need for drone detection.
Concurrent’s pipeline of work is growing strongly. Last year, it secured £145mn-worth of design wins — more than three times its revenue. These wins “typically convert” into purchase orders within three years and revenue within 10 years, according to the company. House broker Investec points out that design wins slowed in the second half of the year because of the US government shutdown, but that the overall figure was still “very large relative to the rest of financials”.
Concurrent’s strong performance is reflected in the demanding forward price/earnings ratio of 24 times, but its balance sheet strength and structural growth drivers more than justify this valuation.
BUY: Tesco (TSCO)
Despite increasing its market share to a decade high, Tesco’s solid results were overshadowed by its cautious stance on the effects of the war in the Middle East, writes Erin Withey.
Sales at the FTSE 100 retailer were 5.4 per cent higher year on year, at £74bn, while operating profit increased by more than 10 per cent in the period to £2.98bn. Tesco’s market share gains were supported by cost optimisation.
The grocer reported sales growth across all of its divisions, with particular strength in its “Finest” food range. Sales of higher-end dine-in products rose by 15 per cent, benefiting from the consumer switch away from eating out.
But the UK’s largest supermarket was wary in its outlook statement, pointing to “increased uncertainty” as a result of the war in Iran.
Tesco expects adjusted operating profit of between £3bn and £3.3bn for the next financial year, and forecast free cash flow of £1.5bn-£2bn.
The share price has risen by more than two-fifths over the past 12 months, but Tesco remains our pick in the grocery sector in spite of its premium valuation.
HOLD: Churchill China (CHH)
Churchill China pointed to “stable performance across European, North American and UK hospitality markets” in its full-year figures, writes Mark Robinson.
Perhaps standing still is the best a manufacturer of performance ceramics can realistically expect given stickier-than-anticipated inflation and the domestic hospitality industry under continued pressure.
The company has trimmed its sails to take account of the challenging trading backdrop, reducing inventory by about£2mn and arranging substantial forward energy purchases for 2026-27, with 16 per cent open exposure to gas prices this year, and 64 per cent of its gas requirements hedged for 2027. Management also slashed the final dividend to 14p, as it continues to prioritise balance sheet strength.
Annual sales pulled back slightly, while cash profits were down by a fifth to £9.4mn. The steady automation of factory production processes is helping to keep a lid on costs, although the company is experiencing higher unit costs, on top of wage and national insurance increases.
