Intermoney | The EU has urged its governments to increase military spending by at least 1.5 percentage points of GDP, which would imply an increase of around €650 billion in total. To this end, they will present a plan to provide greater fiscal flexibility to governments to boost their defence spending.
We have already published a report in which we analysed why allocating 2% of GDP to defence was not enough to guarantee Europe’s security in the coming years.
Spain is one of the NATO countries that allocates the least to defence in proportion to its GDP (1.28%), and therefore it is where we will see one of the biggest increases if they are to align with the rest of the European allies.
The increase proposed by Brussels would mean that Spain would allocate 2.78% of its GDP to defence by 2029 and for this the expenditure would have to grow until 2029 at a CAGR of 17%. Even if we assume the previous target of 2%, the growth of the sector would also be considerable, as it would have to grow in the next four years at a CAGR of 10%. Taking into account that Indra does not have any significant competitors at a national level and that in recent years its defence division has been growing at a higher rate than the increase in military spending (in 2023 26% Indra vs. 14% defence spending), we could assume that Indra will maintain a growth rate similar to that of the sector in the coming years. The Bloomberg consensus assumes that sales in Indra’s defence division will grow at a CAGR of 24-29%: 6%, so we think estimates will have to be revised upwards.
Space sector: The reduction in American dependence on satellite communications will favour the IRIS2 consortium, of which Indra is a member through Hispasat.
The disagreements on both sides of the Atlantic have also put the space sector in the spotlight. Europe is currently highly dependent on the satellites of Starlink, a company owned by Elon Musk and very close to the American government. This dependence has become more visible in Ukraine, where, after the telephone and network networks were affected by the bombings, Starlink helped them with tens of thousands of satellite dishes. It is estimated that they have around 42,000, the vast majority of them financed by Poland. Apart from civilian communications, they have also been of great importance for military communications, and are currently indispensable for the Ukrainian armed forces, especially with regard to the operation of drones. This dependence is said to be being used by the American government to press for the signing of a peace agreement.
In recent days, rumours have been circulating about the possible replacement of Starlink by a European company, as Europe cannot afford to depend on the US for services as critical as satellite communications. The problem is that there is currently only one company that could replace Starlink, the Franco-British company Eustelsat, and as a result its share price has risen by 500% since last Monday.
Eustelsat is currently the only company, together with Starlink, that operates a constellation of low-earth orbit (LEO) satellites with global coverage. The Starlink constellation has more than 7,000 satellites, while the Eustelsat constellation has 630 satellites, backed up by 36 geostationary orbit (GEO) satellites, but which would have the capacity to offer services similar to Starlink in Europe. In Europe, Starlink offers a broadband speed of 200 megabits per second, while Eustelsat offers 150. Furthermore, Eustelsat terminals would cost around €10,000, plus a monthly subscription, while Starlink would be charging a one-off payment of $590, plus a subscription of between $29-40 depending on the type of use. The French and UK governments each own a 24.8% stake in Eustelstat.
Another solution being developed by the European Union is the IRIS 2 (Infrastructure for Resilience, Interconnectivity and Security by Satellite) project, the problem is that it will not be fully operational until 2030. This consortium, made up of Eusteltat, Hispasat and SES, aims to create a constellation of 290 satellites (264 LEO and 18 MEO) with the aim of providing secure and resilient communications throughout Europe. It will be more aimed at governments, defence and strategic sectors, while Starlink would be more focused on individuals.
The financing structure of IRIS 2 is a public-private partnership (PPP) with a total investment of €10.5 billion, including €6.5 billion of public funds and €4 billion of private investment. Hispasat has committed to invest up to €600 million and will be in charge of supervising the ground segment and the LEO constellation layer. We believe that Indra’s presence in this consortium will provide them with a fairly recurring source of future income. Indra is still undervalued compared to the European defence sector. The sale of Minsait will allow them to converge with the sector multiples.
According to the leleconomista newspaper Indra is in advanced talks with Apax Partners for the sale of its technology subsidiary Minsait for more than €1.5 billion, which would imply multiples of 8.5x EBIT or 7.7x EBIT if the mobility division is included vs. 11x EBIT for the IT sector. We think that €1.5 billion is a low price at which value would be destroyed for Indra. An attractive sale price would be above €1.8 billion, more in line with the multiples at which the sector is trading.
The cash inflow that the sale of Minsait will bring, together with Indra’s current good financial position, will give it great purchasing power to continue growing in defence. One of the next steps would be to take control of ITP Aero, of which Indra already owns 9.5%. ITP Aero is a Spanish company and a global leader in the production of aeroengines and components for both civil and military aviation. In 2023 it reported revenues of €1,305 million and EBITDA of €217 million (margin of 16.6%).
Indra, despite its huge revaluation so far this year (+50%), has revalued less than its European peers and continues to trade at multiples well below the European defence sector. Indra is currently trading at 13.4x P/E and 7.3x EV/EBITDA 25e, while the average for the European defence sector is 27x P/E and 16x EV/EBITDA. We therefore believe that Indra’s efforts to transform itself into a purely defensive company will allow it to converge towards these multiples.
After revising our estimates upwards due to the positive trends in the sectors in which Indra operates, we have raised our P.O. to €30/share (from €23.7). The implied multiples of our valuation are still well below the multiples at which the European defence sector is trading.
