Defence on a defensive multiple? No, Tanks

By now, most investors would be familiar with Defence as an investment theme.

And looking back over the past five years, it is no surprise as to why this theme has continued to gain momentum, to now having reinforced its longevity of investability in the market for years to come. 

2022 marked the start of the theme's momentum with the Russian invasion of Ukraine; with drone technology for military use on full display for the world to see.

This was followed by the incremental push for higher NATO expenditure by the member countries. And by 2026, the Iranian war headlined the wrap-up of our February reporting season. 

Consequently, any company fundamentals derived from February now matter less than they did before, as the overarching macro-economic landscape took centre stage in investors' portfolios.   

With all that said, there will always be winners in any situation.

Though in this instance, it appears that they are few in numbers. And perhaps more unfortunately, that victory also comes at a huge cost for others to now bear.

An expense that not only weighs on both companies and the global populace, but extends well beyond just being a financial one. 

Do note that all pricing data sourced for this article was compiled on 2 May 2026, and any material update from companies mentioned below (i.e. ASX:DGT) might result in a significant variance to our included share prices.         

On that note, let's get into it!

Introduction

We have identified and analysed 13 ASX-listed companies with material defence exposure across the full value chain - from your upstream materials, hardware manufacturers, the emerging group of platformers, and sustainment through it all.

To accompany this analysis, we also pulled valuation data from across 36 global defence and defence-adjacent companies during our peer comparison assessment. 

Beyond the pure-play defence names, we have also identified infrastructure and services businesses that the market might not yet have recognised as quality defence plays. Out of our 13 names, five rate as SELL, seven as HOLD, and one as BUY on the Alpha Insights platform.

The interactive table below allows you to scroll further to the right. Please note that I was not able to get the label names perfectly aligned.

ASX Defence Universe

Source: Bloomberg, Alpha Insights. Ratings and Fair Value are derived from Alpha Insights. Our valuation approach may produce systematically different results from sell-side consensus. The gap reflects the difference between the price as of analysis (2 May 2026), against our fair value estimate; it is not a price target, return forecast, or recommendation.

Company Groupings

Pure-play defence technology

DroneShield (ASX: DRO) is the only listed global pure-play counter-drone (counter-unmanned aircraft systems, or C-UAS) company, with revenue scaling from A$57.5m to A$216.5m in FY25, a 276% increase. The company is a category leader in a structural growth market with A$223m cash and zero debt. At 153.4x EV/EBITDA, the implied earnings trajectory requires manufacturing scale-up, margin expansion, and pipeline conversion to all materialise on management's timeline.

Electro Optic Systems (ASX: EOS) manufactures remote weapon systems and high-energy laser (HEL) weapons with an A$518m contracted backlog, including 100kW HEL capability that the company describes as a world-first.

Elsight (ASX: ELS) provides carrier-agnostic connectivity platforms for uncrewed systems with 77% gross margins and US Blue List certification. 86% of FY25 revenue came from a single European manufacturer.

Defence manufacturers with dual exposure

Austal (ASX: ASB) signed a Strategic Shipbuilding Agreement (SSA) with the Commonwealth in August 2025, establishing Austal Defence Australia as the prime contractor for Tier 2 surface vessels (Landing Craft Medium and Heavy), with an A$17.7bn order book providing 8x revenue coverage.

Codan (ASX: CDA) operates two segments: Minelab (metal detection, with gold at US$4,600/oz as at 2 May 2026) and Communications (tactical mesh radios designed for size, weight, and power (SWAP) optimisation, supplied to Five Eyes allied forces, growing 19% organically with an A$294m comms-segment order book). 

Defence-adjacent infrastructure and services 

Civmec (ASX: CVL) is primarily a resources contractor (59% of 1HFY26 revenue) with a growing defence segment (26% of 1HFY26 revenue, up from 12.9% in FY25). It acquired Luerssen Australia in July 2025 (rebranded Civmec Defence Industries in October 2025), gaining prime contractor status on the SEA1180 Offshore Patrol Vessel program.

VEEM (ASX: VEE) is the only major Western supplier of large marine gyrostabilisers for vessels up to 3,000 tonnes, and is the sole-source supplier of certain ball valves and non-ferrous castings for Collins Class submarines under a six-year A$65m ASC contract signed August 2025. VEEM reached Level 1 qualification under the HII-led AUSS-Q programme in early 2026 and has received first RFQs for the Virginia Class submarine supply chain.

Downer EDI (ASX: DOW) is 90% government-backed services after divesting its cyclical businesses, providing base maintenance, fleet sustainment, and infrastructure services.

Upstream supply chain

Lynas (ASX: LYC) is the West's only scaled rare earth refiner, positioned against China's 91% control of global processing. 

IperionX (ASX: IPX) is the sole US commercial titanium producer with US$60m+ in government backing, but is pre-revenue with high dilution risk. 

Weebit Nano (ASX: WBT) holds a monopoly as the only independent qualified resistive random-access memory (ReRAM) provider (licensed by TI and onsemi), also pre-revenue with approximately A$18m in annual share-based compensation costs (FY25) against minimal revenue.

Defence-linked infrastructure

DigiCo Infrastructure REIT (ASX: DGT) operates sovereign data centres, trading at a 43% discount to our fair value of A$4.13. DigiCo has had three CEOs in 12 months with only one year of listed history; governance remains a material risk that may justify a sustained discount to intrinsic value. 

Structural Monitoring Systems (ASX: SMN) is a micro-cap aerospace company with 82% of revenue from avionics retrofits, protected by a 5-7 year FAA certification moat across 3,000+ specific items.

Defence Spending: The Macro Drivers

Global military spending reached US$2.9 trillion in 2025 (SIPRI), the eleventh consecutive annual increase, bringing the global military burden to 2.5% of GDP, the highest since 2009. The total spending on counter-UAS and related air defence systems reached US$29bn in Q1 2026 (Unmanned Airspace). For the narrower C-UAS systems market specifically, it is projected at US$10.6bn in 2026, growing to US$69.7bn by 2034, a 26.5% CAGR (Fortune Business Insights).

European NATO spending surged 14% to US$864bn, the fastest annual increase since 1953. Germany increased 24% to US$114bn. Spain increased 50% to US$40.2bn. NATO members committed at the June 2025 Hague summit to 5.0% of GDP by 2035, comprising 3.5% on core defence and 1.5% on defence and security-related spending, up from the previous 2% headline target.

The EU's ReArm Europe plan mobilises EUR800bn: EUR650bn in national fiscal space exemptions and EUR150bn in SAFE loans. Civilian EU budgets (Horizon Europe, Digital Europe) can now fund dual-use defence projects for the first time.

For Australia, we've committed A$425bn over the next decade through the National Defence Strategy, with defence spending projected at 3.0% of GDP by 2033-34. The AUKUS submarine construction yard at Osborne received A$3.9bn in February 2026. 

More notably, while the RBA was tightening into consumer weakness, most of our ASX defence names/divisions delivered strong revenue growth, illustrating a feature of defence spending, which is structurally counter-cyclical to broader consumer demand. A point of interest for those thinking about constructing/future-proofing their portfolios.  

The read-throughs from current conflicts 

Ukraine created counter-drone as a standalone procurement category with dedicated funding, directly driving DRO and ELS pipeline growth. Middle East escalation reinforced the requirement for critical infrastructure protection from low-cost drone threats, opening DRO's civilian addressable market via the US SaferSkies Act. 

Indo-Pacific tensions underpin the AUKUS submarine program (ASB), Henderson Defence Precinct expansion (CVL), submarine component qualification (VEE), and rare earth supply chain independence (LYC).

Where ASX Defence Sits in the Global Cohort

The table below ranks 36 global and ASX defence names by their forward EV/EBITDA & Price-to-Earnings (P/E) ratio. The comparison is on headline multiples and does not adjust for differences in scale, maturity, revenue quality, or business model between the ASX names and global peers. 

Global and ASX Defence Peer Comparison, Ranked by P/E NTM

Source: Bloomberg, Alpha Insights, (2 May 2026) ASX names in bolded. We have only included ASX names which are expected to be profitable in the near-term. 

ASX defence-tech names cluster at the top of the global P/E distribution. Elsight (89.7x) sits between Palantir (109.2x) and Kratos (82.0x). DroneShield (80.2x) sits in the same cluster. Codan (61.1x) sits between Kratos and Elbit Systems (55.1x). The global established defence prime median (LMT, GD, NOC, RTX, LHX, HII, BAE, Thales, Leonardo, Airbus) is approximately 15.7x EV/EBITDA and 23.0x P/E NTM, well below where the ASX defence-tech cohort trades.

A pattern that strikes out here is that the ASX defence-tech names with high growth, lumpy contract conversion, and short profitability histories trade above the global primes. 

The ASX defence-adjacent infrastructure and services names sit at or below the global prime median. Austal at 13.7x EV/EBITDA and 22.2x P/E lines up with BAE Systems (13.9x), Leonardo (13.0x), and Airbus (13.0x), consistent with its sovereign shipbuilder positioning. Civmec at 9.9x EV/EBITDA and Downer at 9.6x trade below General Dynamics (15.3x), Northrop Grumman (17.4x), and Lockheed Martin (17.6x) on EV/EBITDA.

However, the ASX defence-adjacent infrastructure and services names, which carry contracted backlogs, government-backed revenue, and self-funding capacity, trade below them.

Earnings Visibility and Capital Requirements

Distinguishing what has been contracted as a backlog from what remains in the pipeline as unconverted is an important caveat.

For instance, the order book of ASB's $17.7bn is government-contracted with sovereign backing, CVL's $1.75bn order book converts at an 85% historical rate with 3.4x revenue coverage, compared to an ASX engineering and construction peer median of 2.1x (Monadelphous, Downer, Worley). 

On the other hand, DRO's $2.2bn is a pipeline estimate, which is a different kind of number; A pipeline conversion is a forward judgement provided by management. And while there is a degree of tangibility to them, they are ultimately not a balance sheet item.

And to further complicate matters, another dimension to the mix is the company's funding profile. For example, Electro Optic Systems is borrowing from Washington H. Soul Pattinson (Soul Patts) at 14.75% interest. Comparing that with DroneShield, which holds A$223m in cash, has zero debt, or even a pre-revenue business such as an IPX, highlights that each company needs to be approached differently while assessing funding risks.  

Given their respective cost of capital, dilution risk, and ability to convert pipeline into revenue without external funding events, a peer comparison table using EV/EBITDA or P/E, while a good start in the right direction, does not adequately capture the whole picture.

Management Credibility

Our platform scores management across six dimensions: guidance accuracy (20%), strategic execution (20%), CEO tenure at company (15%), industry experience (15%), ownership alignment (15%), and compensation structure (15%).

Bottom Line

The ASX defence sector is structurally bid, but the bid is not evenly distributed across the value chain. The defence-tech names with category leadership and growth runway (DRO, EOS, ELS, CDA) trade at multiples that exceed the global primes and require sustained execution on manufacturing scale-up, margin expansion, and pipeline conversion. The defence-adjacent infrastructure and services names (CVL, ASB, DOW) trade below the global prime median despite carrying contracted backlogs, government-backed revenue, and self-funding capacity.

The framework that sorts the cohort is 1) contracted backlog versus pipeline, and 2) self-funding versus external funding dependency. 

Austal (ASB) has 8x revenue coverage in contracted, sovereign-backed work. Civmec (CVL) has 3.4x with an 85% conversion rate. Downer EDI (DOW) has government-backed work in hand and an active buyback. DroneShield (DRO) has 10x pipeline coverage that is not yet contracted. Electro Optic Systems (EOS) has a 14.75% loan facility, funding the gap between contracted backlog and conversion. The market is pricing the pipeline names as if conversion is closer to certain than the contracts suggest, and pricing the contracted names as if the mix shift toward defence has not yet happened.

Civmec (CVL) is the cleanest example of the framework, even though our rating is HOLD with the current price at a ~50% premium to our A$1.07 fair value. The mix-shift dynamic, the segment margin gap, and the position relative to ASX and global defence-fabricator peers; the rating reflects that the market has already priced the trajectory ahead of where our DCF places it. The upside case requires defence wins beyond the current OPV program and sustained margins above the resource base. The downside case is a resources capex cycle that compresses 59% of the revenue base faster than defence can grow.

DigiCo Infrastructure REIT (DGT) is the only BUY in the universe, and the framework treats it differently. The ~50% discount to fair value reflects governance overhang from three CEOs in 12 months and one year of listed history, not a mix-shift thesis. Whether the discount closes depends on governance stabilising; the underlying asset base and sovereign data centre exposure are not in dispute. 

DOW, ASB, and LYC also trade modestly below fair value (-14%, -10%, and -13%, respectively) but sit at HOLD on our framework, which requires conviction beyond a small valuation gap to clear the threshold.

The names where the analysis suggests the narrative has run beyond what the numbers support are DRO, EOS, IPX, and WBT. In each case, the gap between the current price and our fair value reflects different drivers (DRO: pipeline conversion; EOS: funding cost and conversion timing; IPX and WBT: pre-revenue with high dilution risk but the common thread is that the market is paying for outcomes that are not yet earnings.

Regards,

Ryan Lim
Alpha Insights