Johanna
Englundh:
Morningstar
has
initiated
coverage
of
Sweden’s
largest
defence
contractor,
Saab.
And
I’ve
got
Morningstar’s
equity
analyst,
Loredana,
here
with
me
today
to
hear
more
about
her
thoughts
on
the
stock,
what
made
her
allocate
a
wide
moat
rating,
and
what
investors
should
look
out
for
in
the
future.
Thank
you
for
joining
us
today,
Loredana.
Let’s
start
with
a
fair
value
estimate.
You’ve
set
a
fair
value
estimate
on
Saab
stock
at
860
Swedish
kronor.
What
lies
behind
this
valuation?
Loredana
Muharremi:
Hi,
Johanna.
Our
fair
value
of
SEK860
is
backed
by
higher
defence
spending,
as
well
as
margin
expansion
due
to
a
shift
in
product
mix
towards
the
dynamics
and
surveillance
system,
which
have
higher
margin
and
are
more
cash
generative.
Moreover,
we
have
the
majority
of
the
programs
that
are
shifting
from
development
phase
to
production
phase.
So,
Saab
derives
the
majority
of
its
revenues
in
Europe.
We
see
many
opportunities
here,
starting
with,
of
course,
Sweden.
In
Sweden,
Saab
is
the
biggest
defense
contractor,
and
the
country
has
pledged
around
SEK300
billion
for
defence
spending
between
2023
and
2025.
And
we
expect
Saab
to
be
able
to
capture
around
60%
of
it.
Moreover,
the
company
is
an
international
leader
in
anti-tank
weapons,
in
radars,
in
electronic
warfare.
So,
we
think
it
is
very
strongly
positioned
to
gain
from
the
raise
in
demand
due
to
the
Russia-Ukraine
war.
And
this
is
not
only
a
short-term
gain.
We
see
it
as
also
a
long-term
opportunity,
as
European
countries
will
have
to
replenish
their
stocks
on
this
platform
thereafter.
Moreover,
Germany
is
another
very
important
opportunity.
In
Europe,
Germany
is
said
to
become
the
third
largest
defence
spender
globally
in
2025.
And
Saab
is
very
strong
there
in
electronic
warfare
and
surveillance
for
the
Navy.
But
also
currently,
it
has
received
the
role
to
upgrade
the
electronic
warfare
system
for
Germany’s
Eurofighter
aircrafts.
Finally,
if
we
move
outside
of
Europe
and
we
look
at
U.S.,
Saab
is
starting
the
delivery
of
the
T-7A,
which
is
a
training
fighter
jet
that
it’s
developing
with
Boeing.
So,
there
are
exciting
opportunities.
And
these
are
the
main
reasons
that
are
backing
our
SEK860
fair
value.
Englundh:
Okay.
And
you’ve
also
allocated
Saab
Morningstar’s
highest
moat
rating.
What
made
you
give
Saab
a
wide
moat?
Muharremi:
Yeah,
when
we
consider
the
moat
for
Saab,
and
we
assign
the
wide
moat,
we
consider
the
technological
requirements,
the
switching
cost
and
the
regulatory
barriers
that
are
present
in
defense.
Saab
derives
95%
of
its
revenue
in
defense.
And
while
competition
for
a
bid
among
incumbent
players
is
very
intense,
once
a
company
wins
a
successful
military
program,
then
it
guarantees
a
long
stream
of
revenue
with
high
switching
costs.
The
switching
costs
are
so
high
because
of
the
contract
in
defense.
Defense
contract
usually
starts
as
cost
plus
contracts
in
which
the
military
assumes
the
risk
of
any
cost
overruns
during
the
initial
phase
of
the
program
and
only
shifts
into
fixed
price
contracts
once
the
platform
goes
into
production,
so
once
the
risk
of
the
platform
is
lower.
So,
switching
costs
for
the
military
are,
given
the
capital
that
they’ve
invested,
the
time
that
they’ve
invested,
very
high
to
move
to
another
contractor
once
the
program
is
up
and
running.
Moreover,
if
we
look
at
Saab’s
record
high
backlog
of
SEK126
billion,
that
only
provides
us
with
a
glimpse
of
Saab’s
future
potential.
And
that’s
because
the
majority
of
the
platform
that
we
have
there
have
long
development
phase
cycles,
long
production
cycles
and
high
after
market
opportunities.
Development
cycles,
they
go
from
two
years
to
multi-decades.
And
we
believe
that
platforms
with
longer
development
cycle
like
fighter
jets,
submarines,
they
weren’t
a
stronger
moat
because
of
higher
switching
costs.
So,
it’s
easier
for
the
military
to
work
with
a
current
contractor
in
solving
any
issue
than
switching
to
another
contractor
and
starting
a
development
phase
from
scratch.
Regarding
production
cycle,
when
a
company
wins
a
platform
that
has
long
production
cycle,
then
basically
it
has
the
monopoly
on
that
program
for
the
entire
life
of
the
program,
and
that’s
because
there
is
no
viable
substitution.
So
again,
high
switching
costs.
And
in
Saab,
we
have
platforms
like
fighter
jets,
submarines,
naval
vessel
which
go
between
more
than
30
years
of
production
cycle.
Finally,
if
we
look
at
the
platforms
that
Saab
has,
the
majority
of
them
have
aftermarket
framework
contracts
that
go
between
4
years
to
10
years.
Aftermarket
frameworks
are
very
important
because
they
generate
a
recurring
and
safe
stream
of
revenues
with
high
margin.
So,
they
increase
the
earning
quality
of
the
company.
Englundh:
Okay.
So,
you
mentioned
switching
costs
there.
Can
you
give
us
some
insights
into
Saab’s
biggest
competitors
and
where
you
see
Saab
in
that
mix?
Muharremi:
Yes.
So,
if
we
look
at
Europe,
there
we
see
–
we
can
mention
wide
moat BAE,
wide
moat
Thales
and
wide
moat
Dassault.
If
we
look
at
U.S.,
then
we
have
General
Dynamics,
Boeing,
Lockheed
Martin.
Now,
Saab’s
strategy
has
been
focusing
on
avoiding
to
go
in
direct
competition
with
its
bigger
competitors,
while
building
expertise,
focusing
on
niche
market
and
then
leveraging
these
expertise
to
create
partnership
and
join
venture
with
these
competitors.
Example
of
this
is
the
one
that
we
have
already
mentioned,
the
T-7A
that
it’s
doing
in
collaboration
with
Boeing.
And
the
T-7A
has
been
selected
as
the
main
training
fighter
jet
for
the
U.S.
Army.
So,
a
very
important
opportunity.
In
missiles
also,
it
has
important
partnership
with
the
MBDA,
Diehl
Defence,
Boeing
and
also
has
recently
won
a
partnership
with
BAE.
Saab
has
been
selected
to
upgrade
the
electronic
warfare
for
BAE
CV90
staple.
So,
we
see
this
strategy
that
Saab
has
implemented
as
very
successful
as
it
allowed
the
company
to
expand
outside
of
Sweden
while
sharing
the
risk
of
the
programs
with
its
competitors
and
leveraging
their
presence
in
other
countries.
Englundh:
Okay.
So,
looking
ahead
then,
what
do
you
think
investors
should
keep
an
eye
out
for?
Muharremi:
We
expect
in
the
short-term
and
the
mid-term
for
growth
to
be
still
driven
by
the
ground
combat
platform,
especially
missiles
and
that’s
due
to
the
high
depletion
rate
that
we
are
seeing
in
the
Russia-Ukrainian
war,
as
well
as
the
current
supply-demand
imbalance.
And
also,
we
see
in
a
very
positive
way
the
fact
that
Sweden
has
recently
entered
the
NATO
and
we
believe
that
Saab’s
position
will
be
reinforced,
especially
in
the
Nordic
and
in
the
Baltic
Sea
regions,
and
that’s
because
NATO
countries
prefer
to
get
procurement
from
other
NATO
countries.
And
we’re
already
seeing
actually
this
trend
with
Saab
being
recently
included
as
one
of
the
contenders
to
upgrade
the
Netherland’s
submarines.
Englundh:
Thank
you
so
much,
Loredana,
for
talking
Saab
with
us
here
today.
And
until
next
time,
I’m
Johanna
Englundh
for
Morningstar.
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