NATO Defense Budgets And Digitalization Will Shape Future Momentum

Key Takeaways

• Growth in defense budgets, advanced product offerings, and digitalization are expected to drive higher revenue, margins, and recurring service income.
  
• Strategic acquisitions and technology partnerships expand access to high-value markets and support innovation in electrification and emerging military needs.
  
• Heavy reliance on defense contracts, project delays, cash flow challenges, slow adaptation to industry trends, and risky expansion plans all threaten stability and future growth.

Catalysts

Engages in the design, engineering, production, testing, and servicing of customized drive systems in Germany and internationally.

• Anticipated sustained growth in defense spending and procurement across NATO and EU countries is expected to boost RENK's order pipeline and revenue, with management highlighting that upcoming increases to defense budgets (not yet included in current mid-term guidance) could provide significant incremental order intake and support 15%+ annual revenue growth toward 2028 and a further ramp-up to €3 billion in revenue by 2030.
  
• Proven ability to rapidly deliver advanced transmission and powertrain solutions for next-generation military vehicles-such as the FAMOUS APC and participation in key programs like the M-1E3 Abrams-positions RENK for increased share of new platform value, which should drive higher revenue per vehicle and reinforce long-term order visibility.
  
• Expansion into digitalization (condition monitoring, predictive maintenance) and high-margin aftermarket business is expected to improve revenue mix, increase recurring service income, and support group margin expansion, as evidenced by growing aftermarket demand and stronger EBIT margin performance in Q1 2025 (EBIT margin up 2.4 ppt YoY).
  
• Recent M&A activity and new strategic technology partnerships (e.g., e-drives, UAVs, chip solutions) enhance RENK's access to emerging high-value markets and innovation in electrification-providing upside to future top-line growth and sustaining earnings momentum as regulatory and customer demands shift.
  
• Strong focus on operational excellence and scalable modular capacity investment (with sufficient production footprint and supply chain localization) enables RENK to efficiently capture incremental demand and improve operating leverage, supporting further EBIT margin gains and higher free cash flow conversion despite temporary working capital swings.

RENK Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RENK Group's revenue will grow by 18.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 11.4% in 3 years time.
• Analysts expect earnings to reach €224.5 million (and earnings per share of €2.23) by about July 2028, up from €56.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €160.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.7x on those 2028 earnings, down from 126.1x today. This future PE is greater than the current PE for the DE Machinery industry at 19.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

RENK Group Future Earnings Per Share Growth

Risks

• RENK Group's growth is currently highly dependent on defense sector momentum (73% of revenue, record defense order intake) and incremental NATO/European military budgets-if political winds shift or budgets are reprioritized away from defense, the company faces significant exposure and earnings volatility due to lack of diversification.
  
• Delays in key customer projects (such as in the M&I segment) are described as "not really untypical," reflecting a project-based business model subject to timing risks, which may lead to earnings lumpiness and unpredictability of revenue recognition.
  
• High working capital requirements (notably due to inventory build and batch delivery schedules) have resulted in negative free cash flow in Q1 and increased net debt-if structural improvements to working capital and cash conversion do not materialize, this could suppress net margins and pressure future earnings.
  
• Secular trends toward electrification, digitalization, and green transition are recognized by management but primarily as "key R&D projects"; potential delays or underinvestment in these areas could leave RENK with a product portfolio at risk of obsolescence, affecting medium
• to long-term revenue streams as industry standards shift.
  
• Management acknowledges the need for potentially large, "value-accretive" M&A (possibly beyond current debt capacity), which introduces execution and integration risk and may necessitate either dilutive capital raises or increased leverage, both of which could negatively impact future shareholder returns and earnings stability.

Valuation

• The analysts have a consensus price target of €69.245 for RENK Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €90.0, and the most bearish reporting a price target of just €52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.0 billion, earnings will come to €224.5 million, and it would be trading on a PE ratio of 36.7x, assuming you use a discount rate of 5.9%.
• Given the current share price of €71.63, the analyst price target of €69.25 is 3.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.