From backlog growth to earnings validation: European defence delivers a broader H1 improvement

• The urgency of European defence autonomy has increased. The US has reduced some of the military assets available to support Europe, while security threats are moving closer to NATO territory.

• Large and growing backlogs provide multi-year demand visibility, while H1 results show that orders are increasingly converting into revenue and profit.

• Across the full underlying index of the WisdomTree Europe Defence UCITS ETF (LSE: WDEF), revenue and EPS grew 13.6% and 18.5% year on year, respectively.

• Management guidance provides a further test of whether the H1 momentum can continue. Five of the ten companies raised guidance or reaffirmed targets that had already been upgraded.

• WDEF offers 27.0% potential upside to our EUR 42 target price by the end of 2028.

The case for European defence autonomy has strengthened

Since our previous update, the need for greater European defence autonomy has increased on two fronts: the reliability of the US security backstop, and the proximity of security threats to NATO territory.

On one side, the US security backstop has become less certain. On 18 June, US Defense Secretary Pete Hegseth announced a six-month review of American force levels and basing in Europe. The review is intended to accelerate Europe's assumption of primary responsibility for its own defence.

Broader troop reductions remain under review, but the US has already reduced some of the high-end assets committed to NATO's crisis-response plans. NATO Secretary General Mark Rutte confirmed that the changes took effect immediately. Reuters reported that the number of US F-15 and F-15E fighters available to NATO would fall by about one-third to 99. The combined number of MQ-4 and MQ-9 surveillance drones would be halved to 12.

On the other side, security threats are moving closer to NATO territory. In early August, an explosive-laden drone was found near the runway at Germany's Leipzig/Halle Airport. The airport is a major cargo and military-logistics hub supporting NATO's eastern flank and Ukraine. Germany's interior minister described the incident as a new hybrid-threat scenario.

US intelligence officials reportedly assessed that Russia was likely responsible, although Germany has not formally attributed the incident and Russia has denied involvement. On 16 August, a NATO fighter shot down a suspected Russian drone that entered Romanian airspace. It was the fourth drone intercepted over the country this year.

These strategic pressures are already being reflected in defence budgets. NATO members have committed to spending 5% of GDP on defence and security-related requirements by 2035, including at least 3.5% on core defence. Based on NATO figures, European defence spending is expected to rise 19.4% in 2026 to EUR 630.4 billion.

The increase is therefore not being deferred until the final years of the 2035 implementation period. European defence spending has already begun to accelerate, providing continued funding support for national procurement and future order intake.

Chart 1: European defence spending accelerates in 2026.

Backlogs provide multi-year demand visibility

Defence budget expansion is moving through the transmission chain from fiscal commitments to corporate revenue, and backlogs are the most direct way to measure revenue that is already secured. Among the ten largest holdings of the WisdomTree Europe Defence UCITS ETF (LSE: WDEF), five of the seven companies with comparable H1 backlog data reported year-on-year growth. Across the eight companies for which the ratio can be calculated, the median backlog-to-revenue ratio was approximately 3.8 times.

This means that existing backlogs alone can support more than three years of production and delivery for most companies, even if new-order growth slows. Multi-year revenue visibility is therefore already embedded in signed contracts rather than dependent on optimistic assumptions about future orders.

This conversion from budget commitment to signed backlog is particularly visible at Rheinmetall and Saab. Defence budgets and European procurement frameworks are being converted into specific, signed contracts that enter corporate backlogs rather than remaining as policy intentions.

In May, Rheinmetall secured a package of Romanian contracts worth EUR 5.7 billion, covering Lynx infantry fighting vehicles, Skyranger air-defence systems, ammunition, and naval vessels. The contracts fall under the European Union's Security Action for Europe (SAFE) framework. Rheinmetall's backlog subsequently reached EUR 80.5 billion at the end of H1, up 44% year on year.

Saab's backlog growth was supported by another major European procurement contract. In June, Poland formally ordered three A26 submarines for SEK 47 billion, with the contract booked in the second quarter. The award accounted for approximately 39% of the year-on-year increase in Saab's backlog, showing how Poland's rising defence spending is being converted into firm, long-term procurement contracts.

Together, the two cases show how expanding national budgets and EU-level procurement frameworks are becoming executable contracts recorded in corporate backlogs. The European policy shift is therefore leaving verifiable evidence in company financial statements rather than remaining confined to budget documents.

Backlog growth and backlog-to-revenue coverage answer two different questions — one is about direction (is backlog rising or falling), the other about depth (how many years of revenue it already secures) — and H1 results are positive on both. Together, they offer more durable support for future revenue growth than a single period of order intake.

Table 1: Defence budget expansion is moving from fiscal commitments to company orders and backlogs.

Company	H1 backlog change year on year	Backlog-to-revenue ratio
Dassault Aviation	-8.50%	8.60x
Rheinmetall	43.80%	8.10x
Kongsberg	37.30%	5.74x
Saab*	60.80%	4.01x
Rolls-Royce	-6.90%	3.65x
Thales	5.70%	3.36x
Leonardo	N/A	3.30x
BAE Systems	11.40%	2.74x
Airbus	N/A	N/A
Safran	N/A	N/A

Source: Company presentations, iFAST Compilations

Data as of 30 June 2026

_{Backlog-to-revenue ratio = H1 2026 defence backlog / FY2025 defence revenue; where fully consistent defence data were unavailable, the closest available business scope was used as a proxy.}

Revenue growth is beginning to reflect backlog execution

H1 results show that backlogs are entering the production and delivery phase. Across WDEF's full underlying index, revenue grew 13.6% year on year and EPS increased 18.5%. The improvement was also generally stronger than expected. Among the eight companies with comparable consensus data, seven exceeded revenue estimates and six beat earnings expectations.

Company disclosures indicate that orders are converting into revenue through two main channels. The first is increased execution and delivery of existing projects. Rheinmetall's Vehicle Systems and Air Defence revenue grew 28% and 62%, respectively, driven by vehicle deliveries and progress on air-defence production. BAE's Platforms & Services revenue rose 12%, with management stating that the business continued to deliver on its significant order backlog. Revenue at Hagglunds and Bofors, Swedish subsidiaries of BAE Systems, increased by close to 30%.

The second channel is the ramp-up of additional capacity. Saab's second-quarter organic revenue increased 29.8%, which management attributed to good project execution and higher deliveries. Production ramp-up drove 36% revenue growth in the Dynamics business. Thales' defence revenue also rose 11.9%, supported by higher production of sensors and effectors.

These results show that the revenue improvement is not concentrated in a single company or project. As project execution, capacity, and deliveries increase, previously secured demand is entering reported financial results. The next test is whether higher revenue can continue to translate into better margins and earnings.

Table 2: H1 revenue and EPS growth were generally stronger than expected.

Company	Revenue growth	EPS growth	Revenue performance	Earnings performance
BAE Systems	+7.9%	+12.1%	Beat	Beat
Thales	+6.7%	+12.9%	Miss	Beat
Rheinmetall	+39.4%	+79.7%	Beat	Beat
Airbus	+12.0%	+21.4%	Beat	Beat
Safran	+19.0%	+21.8%	Beat	Miss
Rolls-Royce	+24.5%	+40.9%	Beat	Beat*
Saab	+25.4%	+27.9%	N/A	N/A
Leonardo	+12.2%	+82.3%	Beat	Miss
Dassault Aviation	+46.0%	+30.0%	Beat	Beat
Kongsberg	+29.0%	+75.3%	N/A	N/A

Source: Bloomberg Finance L.P., iFAST Compilations

Data as of 30 June 2026

Margin improvement shows operating leverage beginning to emerge

The margin improvement was broad-based. Core margins increased year-on-year at all ten companies in the analysis. Rheinmetall's operating margin rose from 12.1% to 15.0%, an increase of 290 basis points. Rolls-Royce's Defence margin increased from 15.4% to 21.0%. Saab's margin rose from 9.6% to 10.6%, while Leonardo's EBITA margin increased from 6.5% to 7.8%.

Management commentary points to several drivers of the improvement. Rheinmetall cited favourable business mix and operating leverage from substantially higher volumes. Saab benefited from a greater revenue contribution from the higher-margin Surveillance and Dynamics businesses, together with better project progress and higher deliveries. Leonardo highlighted higher revenue, solid project execution, better absorption of indirect costs, and efficiency measures.

Higher production and delivery volumes, better project execution, and company-level efficiency measures show that demand growth is translating into stronger profitability rather than merely larger backlogs. Earnings growth materially outpaced revenue growth, providing further support for this interpretation.

Table 3: Core margins across the ten largest holdings are improving.

Company	H1 2025	H1 2026	Change
BAE Systems	10.6%	10.8%	+20 basis points
Thales	12.2%	12.5%	+30 basis points
Rheinmetall	12.1%	15.0%	+290 basis points
Airbus	7.4%	8.2%	+80 basis points
Safran	17.0%	18.4%	+140 basis points
Rolls-Royce	15.4%	21.0%	+560 basis points
Saab	9.6%	10.6%	+100 basis points
Leonardo	6.5%	7.8%	+130 basis points
Dassault Aviation	6.3%	7.9%	+160 basis points
Kongsberg Gruppen	13.9%	16.3%	+240 basis points

Source: Company presentations, iFAST Compilations

Data as of 30 June 2026

Companies use different margin definitions; each figure reflects the company's primary adjusted or underlying operating margin. Rolls-Royce data represent the Defence segment rather than the group. Kongsberg data are restated on a continuing-operations basis following the demerger of Kongsberg Maritime, so the H1 comparison is on a consistent basis.

Budget support and management guidance support continued growth

H1 results already show existing backlogs converting into revenue and earnings. Looking ahead, continued growth depends on two conditions: whether additional defence budgets translate into corporate orders and whether companies can keep expanding production and delivery. Current evidence supports both conditions.

First, the transmission of new European defence funding into procurement remains at an early stage. As of 12 August 2026, six member states had received approximately EUR 8.42 billion of SAFE pre-financing. This represented 15% of their combined EUR 56.12 billion approved allocation, but only 5.6% of SAFE's overall EUR 150 billion capacity. SAFE has therefore moved from approval to actual disbursement, but most of the funding has yet to be paid out or converted into procurement contracts and corporate backlogs.

Germany provides a clearer example at the national-budget level. Combining the regular defence budget with the Bundeswehr special fund, available German defence funding is expected to rise 25.1%, from EUR 86.5 billion in 2025 to EUR 108.2 billion in 2026. It is then expected to increase another 29.1% to EUR 139.7 billion in 2027.

Second, management guidance suggests that companies remain able to translate demand into revenue and earnings. Five of the ten companies - Safran, BAE, Leonardo, Rolls-Royce and Thales - raised guidance or reaffirmed targets that had already been upgraded.

Taken together, the outlook is supported across different time horizons. Management guidance validates near-term financial momentum, with SAFE disbursements and national budget expansion provide funding for future orders.

Table 4: H1 guidance is looking positive.

Company	Guidance change
Safran	Raised
BAE Systems	Broadly raised
Leonardo	Partly raised
Rolls-Royce	Raised
Thales	Reaffirmed previously upgraded guidance
Airbus	Maintained
Saab	Reiterated medium-term targets
Rheinmetall	Lowered revenue guidance
Dassault Aviation	Maintained
Kongsberg	No quantified range provided

Source: Company presentations, iFAST Compilations

Data as of 30 June 2026

Notably, Rheinmetall was the only company to reduce its sales guidance. It lowered the range by about EUR 300 million following the change in ownership of the F126 contract, although it maintained its margin target at around 19%.

The differences matter for portfolio construction. Even when an individual holding faces a company-specific contract issue, the broader industry demand environment can remain robust. WDEF reduces exposure to any single contract, platform, or management team. Diversification cannot eliminate execution risk, but it can reduce the effect of company-specific problems on the overall portfolio.

Investing in European defence autonomy: A multi-year structural opportunity

European defence autonomy is not a short-term policy theme. It is a multi-year structural trend that is unlikely to reverse in the foreseeable future. Greater uncertainty over the US security backstop, security threats moving closer to NATO territory, and rising European defence budgets are all pushing Europe to assume greater responsibility for its own defence. Building autonomous defence capabilities requires equipment procurement, capacity expansion, and long-term maintenance, supporting a multi-year investment horizon.

The investment case is also entering a new phase. The first phase was driven mainly by higher defence-budget commitments, expectations of order growth, and broad valuation re-rating. With valuations already higher, market attention is shifting from policy direction to corporate execution. The key questions are whether defence companies can continue to secure orders and convert their large backlogs into revenue and earnings.

H1 results provide broad evidence that this conversion has begun. Backlogs continued to grow at most comparable companies, EPS grew across the fund's full index, margins improved at all ten of the largest holdings, and management guidance remained broadly positive across that same group. Meanwhile, SAFE disbursement remains at an early stage and defence budgets in major markets such as Germany continue to expand, providing further support for future order intake.

We therefore do not believe that the European defence opportunity ended with the earlier valuation re-rating. Instead, the investment case is moving from policy-driven to earnings-driven. Future returns should depend less on further multiple expansion and more on companies' ability to replenish backlogs, raise capacity, and deliver revenue, earnings and cash-flow growth. Execution and portfolio diversification will therefore become increasingly important.

We maintain our positive view on European defence and retain our Buy rating on WisdomTree Europe Defence UCITS ETF - EUR Acc. WDEF currently trades at 20.5 times forecast 2028 earnings. We expect EPS to grow by 31.9%, 23.0%, and 19.7% in 2026, 2027 and 2028, respectively. Based on our 2028 earnings forecast and EUR 42 ETF target price, WDEF offers 27.0% potential upside.

Table 5: WDEF's valuation offers a 27.0% upside into 2028.

	2025	2026E	2027E	2028E
EPS	10.83	14.29	17.58	21.04
EPS growth	-	31.9%	23.0%	19.7%
Price-to-earnings ratio	39.8	30.2	24.5	20.5
Potential upside	-	-	-	27.0%
ETF target price (EUR)	-	-	-	42

Source: Bloomberg Finance L.P., iFAST Compilations.

Data as of 28 August 2026.

Disclosures

At the time of publication, iFAST Financial Pte. Ltd. (IFPL), its related and associated entities, and the analyst who prepared this report did not hold any of the securities mentioned above.

Artificial intelligence tools were used in preparing this research report. iFAST Financial Pte. Ltd. did not rely entirely on AI-generated content. All investment views, ratings, target prices and conclusions in this report were independently reviewed and verified by the research analyst to support accuracy and professional integrity.