BAESF - BAE Systems And General Dynamics: Ukraine Your Tanks Are Here!

Summary

• Defense equipment sent to Ukraine is becoming more and more advanced.
• NATO intends to send 80 to 90 tanks of which 73 are already committed.
• In the near term, there is little opportunity for main battle tank sales.

The war in Ukraine is entering a new chapter after almost a year of pointless bloodshed and I think we can say that the support lines are being moved as the war carries on. When the Russian invasion of Ukraine started I was in Romania a few hundred kilometers from the border. In the hours before the invasion, we saw Ukraine close strategic airports and block its runways to make a landing of Russian troops harder and on the radar we saw more activity above Poland and Romania as NATO started visibly policing the NATO airspace.

Over time, the support lines have moved and we are now at the point that NATO members are agreeing on sending their advanced main battle tank platforms to Ukraine - something that was out of question months ago. In this report, I discuss which tanks are sent to Ukraine, who manufacturers these tanks and I will explain why there is little near-term sales potential for these manufacturers for their main battle tank portfolio.

Support With Heavy Defense Equipment.

Prior the invasion, we saw word leaders supporting Ukraine but refusing to send troops or equipment. As the bloodshed started and continued, Poland was one of the first countries to show extreme willingness to provide defense equipment in the form of fighters to Ukraine, which eventually was blocked. However, led by the UK we saw more and more willingness from NATO members to supply Ukraine with defense equipment. Turkey was one of the first to deliver drones to Ukraine. The Bayraktar drones are not a substitute for fighter jets but proved to be very useful at the early stages of the war.

As the war progressed, allies of Ukraine have been very measured in sending defense equipment fearing that any supply of defense equipment from NATO members to Ukraine would drag NATO into the conflict. Reality, however is that NATO had been involved in the conflict already and at some NATO members did realize this as well as the importance of the outcome of the conflict in Ukraine for the European mainland.

Early on in the conflict, Ukraine already received Javelins and NLAW anti-tank missiles which have been vital to the country’s defense and we saw that as the destruction in Ukraine got worse and worse, countries were more and more willing to send in heavier equipment such as Patriot anti-missile defense systems, as well as Howitzers, M270 Multiple Launch Rocket Systems and HIMARS systems.

Sending Modern Tanks

With systems such as the M270 MLRS, we saw that willingness to send weapon systems that also provide offensive capability was increasing as well as willingness to provide more modern weapon systems to Ukraine. The most recent development is that NATO partners are preparing to send more modern tanks to Ukraine. It is not the first time tanks will be send as Poland and Czech Republic earlier sent T-72M1 tanks, but these were Soviet-era tanks.

The call to provide more modern main battle tanks solutions has been strengthening for a while but mostly in Germany there seemed no consensus on sending those tanks to Ukraine and for some tanks German approval was required as they are the manufacturer of the Leopard 2 tank. Ultimately, Germany caved under the pressure and agreed that it would allow tanks to be sent to Ukraine.

As said, as the manufacturer of the Leopard 2 tank, approval from Germany was key to the plan of sending tanks to Ukraine. Germany at first was hesitant to approve the plan, but it recognized that the failure to reach an agreement would only strengthen Russian plans to make an attempt to capture Kiev on short notice. Furthermore, many countries operate the Leopard 2 tank so if they wanted to send tanks it would be only be able if Germany was on board. The Leopard tank is widely available in Europe with around 700 tanks operated by Spain and Germany alone. The UK has its own tank in the form of the Challenger 2 of which it has 277 while the US has 5,500 M1 Abrams of which 3,450 units are in storage. In broad lines, you can consider the Challenger and M1 Abram unique to just one NATO member, namely the UK and the US while the Leopard 2 is operated by various NATO members. So, things would stand or fall with German re-export approval.

General Dynamics and BAE Systems Manufacture Tanks

At this point it is not known whether countries will actually buy replacement tanks for the tanks that will be sent to Ukraine, but we do have news on which some quantities of modern main battle tanks that will be sent:

• The US will send 31 M1 Abram.
• The UK will send 14 Challenger 2 tanks.
• Germany will send 14 Leopard 2 tanks.
• Poland will send 14 Leopard 2 tanks.
• Canada will send 4 Leopard 2 tanks.

The 31 M1 Abrams that the US intends to send to Ukraine are valued around $320 million for the cheapest variant. With over 5,000 Abrams in the US Army, I do not see a direct need for the Army to order replacements with General Dynamics. The share of General Dynamics in the package of armored vehicles and main battle tanks is significant as the US also has sent or intends to send Bradly Fighting Vehicles and Stryker vehicles which are amoured vehicles. BAE Systems (BAESF) has a relatively low share as its Systems Platforms & Services segment builds the Challenger 2 tank which is only used by Oman and the UK with UK having 227 tanks. The value of the tanks that will be sent to Ukraine is around $87 million. The Leopard 2 tank is not produced by a public company but Rheinmetall ( OTCPK:RNMBF ) provides the 120mm cannon for the tank and due to the broad operator base it should have the biggest share of the total number of tanks that will be sent to Ukraine valued $250 million.

NATO members intend to send 88 tanks of which several countries already have pitched in to send 77 tanks. Countries that also intent to send tanks, but for which numbers have not been quantified are Norway, Spain and Finland. Dutch Prime Minister Rutte has said he is looking at possibilities to purchase tanks to send to Ukraine, but it is unlikely that these will be new tanks. The Royal Netherlands Army currently leases 18 tanks from Germany and they will be looking to either buy some of those tanks to send to Ukraine or financially contribute to other countries sending some of their tanks. Either way, one thing is clear and that is that interest in main battle tanks is on the rise. After the Cold War, many European countries brought the number of main battle tanks down significantly from thousands to several hundreds and in the case of the Dutch Army there are no owned tanks.

During the Cold War, the German Bundeswehr had over 7,000 main battle tanks and armored vehicles. Today, the equipment count for main battle tanks, other tanks and fighting vehicles is less than 2,000 units. The Dutch Army used to have over 2,800 armored vehicles and tanks and today only 784 vehicles including 18 leased battle tanks are left.

Europe benefited from the peace dividend a long time, but it is clear they now have to “pay that dividend back”. While $655.7 million of main battle tank equipment has been committed to be sent to Ukraine according to estimates from The Aerospace Forum, I do not see near term opportunities for deliveries. Nations have to evaluate their defense equipment needs going forward and it is also not the case that countries can just order new tanks and have them delivered next week. Ordering now would likely mean a delivery in two or more years from now. So, with that in mind I do not see immediate opportunities for sales but countries will likely evaluate their needs. Poland already expressed interest in buying 250 Abrams in the M1A2 SEP v3 configuration prior to the invasion of Ukraine and those tanks will be arriving next year. In the meantime, they will be taking 116 tanks previously operated by the US Marine Corps but I wouldn’t expect that in the near term we are going to see other countries arranging similar purchases.

The only way I could see some opportunities is when the number of tanks sent to Ukraine start growing quite significantly. Right now, allies are intending to send around 90 vehicles, but President Zelensky is looking for over 300 tanks to be delivered to defeat Russia.

Conclusion: Little Near Term Upside In Main Battle Tank Sales

What we are seeing is that the equipment that NATO allies are sending to Ukraine is becoming more and more advanced and the most recent development is the agreement to send modern tanks to Ukraine which should become active by the end of this quarter. With thousands of tanks that can be sourced and a long procurement and delivery process I do not see near term sales opportunities for main battle tanks but in the longer term many countries could be re-evaluation their equipment needs.

The quantities that NATO members intend to send now do not really allow for any significant purchases to be made as the tanks can simply be sourced from the pool of available tanks without having a big impact. However, if the numbers of tanks sent to Ukraine grows possibly towards the 300 tanks that President Zelensky is looking for then I can imagine there would be more sales opportunities. Sales, if any, will take years to materialize and as a result I do not see big upside for General Dynamics, BAE Systems or Rheinmetall stemming from the current plans to send tanks to Ukraine. As a result, I mark I would mark shares of the involved companies a hold rather than a buy based on the current plans. Over the longer term, however, I do believe that there should be sales opportunities as particularly Europe is learning the hard way that it needs to have a battle-ready army.

For the broader defense picture, in which MBT sales also play a role, I continue to believe shares of General Dynamics and BAE Systems remain a buy. Simply, because many armies on the European mainland need to be modernized and armed.

One can also wonder whether sending the most advanced tanks in the world is a start for more. For a long time, sending jet fighters has been out of question but eventually this could also become a possibility if the war in Ukraine carries on.

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