The importance of emerging markets to the global defence sector was underlined again this week when the Stockholm International Peace Research Institute (SIPRI) released its latest arms export report. This showed sales to Gulf Cooperation Council (GCC) countries — comprising Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates — surge 71% between 2005-2009 and 2010-2014.
“Mainly with arms from the USA and Europe, the GCC states have rapidly expanded and modernized their militaries,’ SIPRI senior researcher Pieter Wezeman commented. And he added that “the GCC states, along with Egypt, Iraq, Israel and Turkey in the wider Middle East, are scheduled to receive further large orders of major arms in the coming years.”
BAE Systems Poised To Bounce
The report revealed that the volume of global international defence sales during 2010-2014 rose 16% from the prior period. And for BAE Systems (LSE: BA) in particular, news that India and Saudi Arabia were the largest and second-largest importers during the past four years will come as excellent news — the company has long been a critical hardware provider to the Middle East nation for donkey’s years, and established a BAE Systems India unit more recently.
BAE Systems has seen orders from non-UK and US customers flood in during recent years, and the business said that it expects these sales this year to rise 10% from 2014 levels. In particular, it cited the need for increased levels of support for the Salam Typhoon contract from Saudi Arabia as a major top-line driver in the coming year — the company delivered another 11 of the aircraft last year.
Indeed, BAE Systems expects the Emirate state to remain a major customer for some time to come, and in June announced a major reorganisation of its operations in the country. This included merging the holdings of the group with that of Riyadh Wings to boost its effectiveness in the fields of training, electronics and IT systems engineering, with BAE Systems holding a 51% stake in the new entity.
Rolls-Royce Primed For Lift-Off
Of course the prospect of surging demand from new territories — combined with the prospect of growing spend from the US and UK on the back of improving economic conditions — also bodes well for diversified engineer Rolls-Royce (LSE: RR).
The business provides aeroplane engines and aftermarket services to the world’s militaries, and derives more than a fifth of all profits from its Defence division. But Rolls-Royce is also a major military component provider in other areas, and its Marine arm built the engines, propellers, rudders, and steering equipment for the HMS Queen Elizabeth, the Royal Navy’s latest aircraft carrier.
As the economic might of emerging markets stomps higher in coming years, and the number and scale of conflicts raging across the globe demands an increase in global arms spend, I believe that BAE Systems and Rolls-Royce are in prime position to enjoy stunning revenues growth.
