SAAB Initiation of coverage: Backlog conversion is clear; returns not as much

Rooted in Sweden’s industrial heritage, SAAB is a defense-technology company with a Western-friendly offering spanning the air, land, and naval domains. The current defense upcycle, sparked by the war of aggression against Ukraine and reinforced by European and NATO demand, is driving a period of high growth, profitability and returns on capital for SAAB. Because we expect this phase of abnormally strong demand to ease much sooner than the market seems to expect, we view the current valuation as (P/E ~51x for 2025) unsustainable and initiate coverage with a Sell recommendation and a target price of SEK 310.

A defense technology company with a broad offering

SAAB is a defense-technology company with a NATO-compatible, multi-domain offering and a development and manufacturing footprint across much of the Western world. Its financial performance has historically fluctuated, reflecting the volatile nature of project-based businesses and defense programs. SAAB is an R&D-focused enterprise with a significant share of its total R&D spending funded through partnerships and collaborations with industry and partner nations. The company operates through four core business areas, each serving a different niche of defense: Dynamics (~23% of group revenue in 2024), focuses on ground combat weapons and systems, and has been the most important pillar in the company’s performance since 2022, thanks to the current market conditions. Surveillance (~35% of revenue) is SAAB’s main capability within radars and sensors. Kockums (~13% of revenue) has for centuries been a key Swedish builder of surface and subsurface naval systems. Aeronautics (~26% of revenue) has a strong track record of developing and manufacturing fighter aircraft, with the JAS 39 Gripen being a key asset.. Additionally, Combitech operates as an independent unit specializing in cross-division systems integration and digital infrastructure development.

SAAB is a key beneficiary of the current defense spending spree

Driven by significant demand tailwinds, the company grew revenue at ~23% CAGR in 2022-24, largely from European stockpiling and the need to supply weapons to Ukraine. Some of the most affected nations have shifted fiscal spending toward defense quickly, while others will move more slowly. To meet demand, SAAB has expanded capacity (4.3 BNSEK in capex 2024) and plans to invest an additional average of ~6 BNSEK per year in 2025-27 for that purpose. The path toward the NATO target of 3.5% of GDP is long, with the current average around 2.5% (up from ~1.7% in 2022), and several members are facing fiscal constraints. We, therefore, expect demand growth to begin slowing in 2026-27. Accordingly, we forecast a gradual deceleration in SAAB’s revenue growth from 2027 onward, to an average of 13% through 2033. For 2023-27, we forecast ~18% revenue CAGR, in line with company guidance. We also forecast the EBIT margin to improve to ~10% by 2028 on scale efficiencies and to settle around 9.5% over the long term as demand normalizes. Management guides to EBIT growth above revenue growth for 2023-27, which we also forecast.

Current valuation reflects unsustainable expectations

One outcome of the current defense market conditions has been higher valuations, especially for companies that benefit directly from European rearmament, including SAAB. The company trades on a last 12-month EV/EBIT of ~44x, a significant premium to both its history and peer group. Our DCF indicates a fair value of SEK 310 using a moderate WACC of 8%. We believe SAAB is priced at exuberantly high levels, making the risk-reward profile weak. We argue that the strong near-term performance alone cannot support the current valuation, so we anticipate downward pressure on the stock. For these reasons, we initiate coverage with a Sell recommendation.