Chemring, Babcock and Avon top picks in defence sector, with BAE premium ‘not justified’ Proactive uses images sourced from Shutterstock
UK defence stocks could regain momentum once the long-delayed Defence Investment Plan is finally published, according to Jefferies, which said the sector still offers some of the strongest long-term growth prospects in the London market.
The US bank’s defence and aerospace team said the absence of the government’s defence spending roadmap had weighed on sentiment for more than six months, alongside political uncertainty and higher borrowing costs.
Originally intended to be published alongside the Strategic Defence Review in autumn 2025, the release date has repeatedly slipped, with the Ministry of Defence currently working through an internal review of equipment plans and procurement budgets. A potential change in Prime Minister could also change the timeline.
However, Jefferies analyst David Farrell said the sector’s long-term fundamentals are attractive, forecasting that equipment spending could still grow at mid-to-high single-digit rates even if overall defence spending disappoints.
Chemring Group (LSE:CHG) is the “top pick” in the sector, with a ‘buy’ rating and 655p target price maintained. The broker said it was increasingly confident in a recovery at Chemring’s cyber and intelligence arm, Roke, with earnings growth of more than 25% predicted for both 2027 and 2028 financial years.
The bank also retained ‘buy’ ratings on Avon Technologies PLC (LSE:AVON) and Babcock International PLC (LSE:BAB), arguing both companies remain well placed despite uncertainty around UK defence budgets.
Jefferies described Avon as a “special situation” with scope for significant margin improvement and stronger cash generation, while Babcock was seen as insulated by the long-term nature of its Ministry of Defence contracts.
By contrast, the broker kept hold ratings on BAE Systems PLC (LSE:BA.) and QinetiQ Group PLC (LSE:QQ.), with “all good news” from recent US defence budget proposals “already factored in”, while also being “exposed to disappointing newsflow going forward”, with not all of BAE’s portfolio geared to growing areas of the budget.
Finally, the recent derating of US defence prime contractors leaves BAE trading at a premium to both its US and European peers, “with no outsize growth to justify those”.
Meanwhile, QinetiQ’s shorter-cycle MOD exposure “leaves it more vulnerable to funding delays than peers”.
Cohort PLC (AIM:CHRT) was initiated at ‘hold’, with the Jefferies team seeing it still as having attractive growth opportunities across naval and land defence markets, but warned investors may be too optimistic on margins, noting that detailed analysis of its seven operating businesses “in any one year, just under half go backwards”.