Morgan Stanley has re-rated German defence electronics group Hensoldt AG, moving the stock to an "equal-weight" recommendation from "underweight" and lifting its price target to €82 from €78. The upgrade follows a near-term valuation reset after the shares fell roughly 23% from their October peak, a pullback Morgan Stanley said left the stock at more reasonable levels.
The brokerage said the market has recalibrated expectations in the wake of Hensoldt's recent capital markets day, and that consensus forecasts have now converged with Morgan Stanley's own projections for both the near and medium term. "We feel expectations have now been reset following the group’s recent CMD, with consensus now falling to levels in line with our forecasts," analysts Ross Law and Marie-Ange Riggio wrote in a note dated Jan. 28.
Hensoldt's shares last closed at €87 on Monday, and the stock trades inside a 52-week range of €117.70 to €33.12. The Taufkirchen-based company carries a market capitalisation of €9.14 billion.
At the capital markets day management reiterated a 2030 revenue target of €6 billion, while slightly increasing the organic portion of that target to €5.7 billion from a prior €5.4 billion. However, Morgan Stanley flagged that the updated guidance is more back-end loaded than the market anticipated, a profile that introduces greater execution and duration risk.
The company specified a 2030 adjusted EBITDA margin of greater than 20%, and indicated a 450 basis point difference to adjusted EBIT margin driven by amortisation of capitalised research and development costs. Morgan Stanley said that aspect had been underappreciated and not fully captured in consensus numbers.
In response to the revised guidance, Morgan Stanley made adjustments to its modelling. The brokerage trimmed revenue and adjusted EBIT estimates for fiscal 2025 through 2027 by between 1% and 3% to align with the updated outlook. Forecasts for earnings per share were reduced by 4% to 8%, a move the bank attributed to higher net interest costs.
On the free cash flow side, Morgan Stanley raised its fiscal 2025 estimate by 57% to €378 million. That figure implies conversion of 83% of adjusted EBITDA into free cash flow, a level well above Hensoldt's own stated target range of 50% to 60%. The brokerage said the uplift in the 2025 free cash flow view was driven by downpayments.
Conversely, the analysts cut free cash flow forecasts for fiscal 2026 and 2027 by 30% and 19%, respectively, reflecting elevated capital expenditure requirements to support future growth.
On valuation, Morgan Stanley noted the shares are trading on a 2028 price-to-earnings multiple of 27 times, which it described as modestly above the 20 to 25 times two-year forward range the bank expects the sector to trade in. The brokerage said the premium appears justified due to Hensoldt's exposure to rising German defence spending, its pure-play defence positioning and its specialisation in air defence equipment.
Germany makes up about 60% of Hensoldt's revenues. For fiscal 2025, Morgan Stanley expects group order intake of €4.6 billion and a book-to-bill ratio of 1.9 times, sitting at the top end of an upgraded guidance range of 1.6 to 1.9 times. That expectation is driven by order approvals in Germany at year-end. Group revenues of €2.5 billion are forecast in line with the updated guidance.
This analysis lays out the chief adjustments Morgan Stanley has made to its view of Hensoldt following management's updated targets and the market reaction. The move to equal-weight reflects a combination of a lower market valuation after the pullback and revised cash flow and margin projections that both lift and lower parts of the forecast profile across the mid-decade period.