Ukraine Ceasefire: BAE vs Babcock

Given the UK's steadfast support for Ukraine, a potential ceasefire would likely influence the nation's defence sector, with some companies being more exposed than others.

Peace Negotiations on the Horizon?

Some European defence firms faced selling pressure following reports on Wednesday evening of talks surrounding a potential peace deal to end the war in Ukraine. There has been no direct communication between the US and Russian presidents since the early stages of the conflict. However, US President Donald Trump apparently held separate phone calls with his Ukrainian and Russian counterparts and announced he had instructed his government to initiate peace negotiations, stating that both warring parties desired peace. Reports also indicated support from China for the negotiations, which has even offered to host a summit in Beijing to reach an agreement. Although the process is in its infancy, the potential to end the war would naturally impact defence spending in the short and medium term, leaving investors hesitant to drive stock prices higher.

Concurrently with the news, the UK government announced its latest £150 million military aid package to Ukraine as Western defence leaders meet over the course of several days in Brussels to shore up support for the country. Both Babcock and BAE Systems would receive a share of that spending: Babcock would train Ukrainian personnel on the Challenger 2 tanks, while BAE Systems would repair Archer artillery systems. The issue is that if a peace deal is reached, both companies could see a reduction in income streams, but one might not only be significantly less affected but might also manage substantial growth.

Nuclear vs Defence Divisions

The immediate market reaction to the Ukraine news provides some foreshadowing of what could happen if a lasting ceasefire were to be agreed upon, but it is not to be taken at face value: BAE Systems stock rose higher following the combination of announcements while Babcock stabilised, though this comes after the latter raised its forecast and gained 22% in its share price so far this year.

BAE provides military hardware, while the Babcock engages in a wide range of government contracting work. Using the latest contracts as an example, Ukraine will still need to train and repair tanks even during peacetime to maintain its military, while the demand for ammunition would plummet if fighting were to stop.

On the other hand, Babcock recently updated investors that the company is seeing strong demand in its nuclear division thanks to both the decommissioning of civil reactors and increased demand for submarine support. If a peace deal is signed, the company's engineering services could additionally be in high demand in Ukraine as the country looks to modernise its nuclear facilities and recover from the war.

Babcock Pennant Signals Upside

The chart pattern left behind on Babcock appears to be a pennant, which could break towards the measured-move projection of 700 GBX. The bullish continuation pattern hangs on the break of the 660 GBX peak formed in December 2019. On the flip side, sliding below the pennant's upper bound at 575 GBX could open the door to the 500 GBX round support level, exposing 450 GBX and lower regions.

Source: SpreadEx / Babcock

Key Takeaways

While a potential Ukraine ceasefire could impact the defence sector in the UK, the effects may vary between companies like BAE and Babcock. BAE may still benefit from training and repairs, while Babcock, with its diverse operations, including its nuclear division, could cushion any possible downturns and potentially benefit from post-war recovery efforts in Ukraine.