Year-End Report January – December 2025

MilDef reported strong FY2025 commercial momentum with order intake up 76% to SEK 3,193m and an order backlog of SEK 3,595m; full-year net sales rose 70% to SEK 2,045m (organic +6%, acquired +64%). Q4 net sales jumped 87% to SEK 783m (organic +13%), adjusted EBITA for Q4 was SEK 150.8m (19.3% margin) and full-year adjusted EBITA was SEK 276.3m (13.5% margin); adjusted EBIT was SEK 209.0m for the year. Free cash flow was positive in Q4 (SEK 59.6m) but negative for the year (SEK -33.5m) due to working capital tied to growth; adjusted EPS diluted was SEK 3.04 and the Board proposes a SEK 0.75 dividend. Management highlighted the acquisition of roda (which weighed on gross margins), significant defense contracts (including two SEK 320m orders and a SEK 52m L3Harris sale), and continued capacity investments while remaining cautiously optimistic given supply-chain volatility.

Analysis

Market structure: MilDef’s 75% acquisition-driven growth and SEK 3,595m backlog (up 75% y/y) shift share to mid‑cap niche rugged-IT integrators with strong NATO/EU exposure. Organic growth is modest (6% FY), so near-term revenue is backlog-conversion driven; reported gross margin 45.0% (ex‑roda 53.5%) signals acquisition dilution but higher scale and a Q4 adjusted EBITA margin of 19.3% shows operating leverage. Expect pricing power in rugged military servers/networking where certification and security create high barriers to entry, benefiting incumbents and primed integrators over generic IT OEMs.

Risk assessment: Key tail risks are supply‑chain shocks in DRAM/NAND (AI-driven lead‑time/price swings), failed integration of roda (hit to margins >300‑400 bps), and working‑capital stress—FY FCF = SEK -33.5m despite Q4 +59.6m. Time horizons: days–weeks sensitive to component lead‑time headlines; quarters hinge on backlog conversion and capex ramp (Rosersberg/Helsingborg capacity online by mid‑2026); multi‑year upside tied to sustained European rearmament and repeat orders. Hidden dependency: margin recovery assumes mix shift back to non‑acquired product lines and stable memory pricing.

Trade implications: Tactical overweight defense: favor MilDef equity exposure (small‑cap growth with backlog visibility) and broad defense ETF exposure (ITA) for 6–12 months while trimming exposure to pure commercial IT hardware integrators with volatile component pass‑through. Use capped option structures to limit downside: buy 3–6 month call spreads on defense primes (LHX) for convexity into continued NATO procurement; reallocate cash from semiconductor cap‑intensive longs if NAND prices rise >10%.

Contrarian angle: Consensus may underprice conversion risk and working‑capital strain—if MilDef converts >60% of backlog in 12 months and maintains >12% adjusted EBITA margin, equity could rerate 15–30%. Conversely the market may be underreacting to DRAM/NAND volatility where a sustained 10–20% price rise would compress system integrator margins, creating a two‑way trade: long scaled integrators with backlog (MilDef) and short high‑inventory integrators lacking defense contracts.

Key Decisions for Investors

• Establish a 2–3% long position in MilDef Group AB (MilDef) on Nasdaq Stockholm within 2 weeks; target 12–18% upside in 12 months conditional on backlog conversion >50% and adjusted EBITA margin sustaining >=12%. Set stop‑loss at -25% if FCF remains negative for two consecutive quarters or order cancellations exceed 10% of backlog.
• Overweight iShares U.S. Aerospace & Defense ETF (ITA) by +1.5–2.0% of portfolio for a 6–12 month horizon to capture European rearmament momentum; fund by reducing exposure to commercial IT hardware integrators (reduce by 1.5%).
• Initiate a small, defined‑risk L3Harris (LHX) 3‑month call spread sized to 0.5–1.0% portfolio risk to capture upside from prime‑contractor activity; cap max loss at premium paid and set profit‑take at 2.5x premium or +20% absolute move.
• Pair trade if cautious: Long MilDef 2% vs short semiconductor equipment/external storage OEMs (e.g., SOXX underweight by 1%) for 3–9 months to hedge DRAM/NAND margin pressure; unwind if NAND/DRAM spot price moves >±10% or lead‑time news changes within 30 days.
• Monitor actionable triggers in next 30–60 days: (a) DRAM/NAND price change >10% or lead‑time swing >30 days, (b) MilDef Q1 delivery rate (>=50% of Q4 backlog shipped) and (c) German defense procurement announcements – if negative on two triggers, reduce MilDef exposure by 50%.