Warship maker TKMS forecasts higher margins as defence spending soars

By Christoph Steitz and Tom Käckenhoff

FRANKFURT/DUESSELDORF (Reuters) -TKMS, the defence business that German conglomerate Thyssenkrupp aims to spin off this autumn, plans to raise its profit margin to more than 7% to close a gap with rivals, banking on soaring military demand amid fears of Russian aggression.

TKMS, which makes submarines, frigates as well as sensor and mine-hunting technology, has more than tripled its order backlog in five years. It now stands at 18.6 billion euros ($21.8 billion) as governments around the world beef up warship fleets.

In the medium term, TKMS plans to raise its operating profit margin to more than 7%, compared with 4.3% in the 2023/24 fiscal year, and is targeting average annual sales growth of 10%, it said on Tuesday at a capital markets day.

FUELLED BY GEOPOLITICAL MOMENTUM

"As TKMS, we are not only ideally positioned for the spin-off, but also to meet the dynamic demand of the market," TKMS CEO Oliver Burkhard said.

TKMS has helped parent Thyssenkrupp's shares to triple in value this year, as investors have flocked to defence stocks amid Russia's war in Ukraine and dwindling certainty over U.S. military support for Europe.

TKMS expects its addressable market to double to 61 billion euros by 2033, up from 31 billion in 2024.

Thyssenkrupp plans to spin off 49% of TKMS to its shareholders, with analysts at Jefferies saying it could reach a market value of around 2.3 billion euros ($2.70 billion), or nearly a third of Thyssenkrupp's total.

BERLIN SEEKS INFLUENCE

The spin-off comes as Franco-German defence supplier KNDS considers an initial public offering in the coming months, a deal that could see the German government take a stake in the group.

Berlin in July also secured substantial influence over TKMS - including a right of approval if a stake of 25% or more were to be sold after the spin-off - in line with its ambition to keep control over key defence infrastructure.

Shares in Thyssenkrupp were 0.3% lower at 0943 GMT, with a local trader saying the margin target was "not ambitious enough" relative to peers.

Last year, the maritime division of Britain's BAE posted an underlying operating profit margin of 7.7%, while France's Naval Group delivered a 7% margin on its profit from continuing operations.

TKMS aims for a payout ratio of 30 to 50% of net profit and wants to pay its first dividend in 2027.

($1 = 0.8522 euros)

(Reporting by Christoph Steitz and Tom Kaeckenhoff. Additional reporting by Zuzanna Szymanska. Editing by Miranda Murray and Mark Potter)