Defence spending increases are boosting profits for UK firms like Rolls-Royce and BAE Systems, as governments worldwide raise military budgets. Both companies lifted earnings guidance on Thursday, citing stronger demand for defence systems and related technologies.
Rolls-Royce Raises Profit Forecast Amid Defence and AI Demand
Rolls-Royce, known for jet engines and power systems, now expects underlying operating profit of £4.7bn-£4.9bn for this year, up from prior guidance of £4bn-£4.2bn. The company also raised its free cashflow forecast to £3.8bn-£4bn. This growth stems from higher defence spending since Russia's invasion of Ukraine in 2022, plus surging demand from AI datacentres for its gas turbines.
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Additionally, the recovery of long-haul flights has boosted its civil aviation engine business. CEO Tufan Erginbilgiç noted that the recent Nato summit commitments, including Saab GlobalEye and MQ-4C Triton surveillance systems—both using Rolls-Royce engines—will support future orders.
BAE Systems Also Benefits from Government Contracts
BAE Systems, a major UK defence contractor, similarly lifted its profit outlook, driven by increased orders for military vehicles, naval ships, and ammunition. The company's diverse portfolio includes combat vehicles and electronic systems, which are in high demand as NATO allies modernize their forces.
Impact of UK Defence Investment Plan
The UK's belated publication of its defence investment plan confirmed spending on the Tempest fighter jet until 2030 and added £5bn for autonomous weapons. This clarity improves order visibility for firms like Rolls-Royce, which is developing engines for the Brontanax drone, a 'loyal wingman' concept. Erginbilgiç said, "I feel a lot better" about future orders.
Comparison of Defence Spending Growth
| Company | Previous Profit Guidance | New Profit Guidance | Key Growth Driver |
|---|---|---|---|
| Rolls-Royce | £4.0bn-£4.2bn | £4.7bn-£4.9bn | Defence + AI datacentres |
| BAE Systems | Not specified | Higher (unspecified) | Military vehicle & naval contracts |
Key Takeaways for Investors
- Defence spending surge is a multi-year tailwind for UK defence firms.
- Rolls-Royce benefits from dual demand: defence and AI datacentre power.
- Government clarity on projects like Tempest reduces order uncertainty.
- Autonomous weapons and drones represent new growth areas.
- Profit forecasts are rising, but watch for supply chain risks.
Future Outlook and Market Potential
Analysts see sustained growth as NATO countries commit to higher defence budgets. Rolls-Royce is also exploring the US datacentre market for gas turbines, with future orders already secured. The company's transformation under Erginbilgiç continues to yield results, and investors are optimistic about long-term cash generation.
However, challenges remain, including potential cost inflation and geopolitical uncertainties. Yet, the current momentum suggests robust earnings for UK defence leaders.
FAQ
Why are UK defence firms like Rolls-Royce seeing profit boosts?
Increased government defence spending, especially after the Ukraine conflict and NATO commitments, has led to higher orders for military equipment, engines, and surveillance systems.
What is Rolls-Royce's new profit forecast for this year?
Rolls-Royce lifted its underlying operating profit forecast to £4.7bn-£4.9bn, up from £4bn-£4.2bn, and raised free cashflow guidance to £3.8bn-£4bn.
How does AI datacentre demand affect Rolls-Royce?
Rolls-Royce's power generation unit supplies gas turbines for datacentres used by AI companies, creating a new revenue stream alongside defence and aviation.
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