Rheinmetall’s Shipyard Ambition Can’t Mask a €285m Cash Drain

Rheinmetall reports record €73bn order book and 17% profit growth, but revenue miss and €285m cash outflow trigger 5.66% stock drop amid naval expansion plans.

The defence sector’s earnings season has thrown up a paradox that investors are struggling to reconcile. Record order books, double-digit profit growth and ambitious expansion plans are being met with punishing share price declines. Rheinmetall, Germany’s largest defence contractor, embodies the tension most acutely.

The Düsseldorf-based group reported first-quarter results on Wednesday that painted a sharply divided picture. Revenue rose to €1.94bn, a modest 8% increase year-on-year, but fell well short of the €2.3bn analysts had pencilled in. The shortfall stems from delivery delays on military trucks and production shifts at its Spanish munitions plant in Murcia — issues management insists are temporary, with the deferred revenue expected to land in the second quarter.

Investors, however, were not in a forgiving mood. The stock opened 3.4% higher before reversing course to close at €1,352.80, a decline of 5.66%. The sell-off wiped out the day’s early gains and then some.

The Merger That Changes the Narrative

February’s acquisition of NVL marked Rheinmetall’s formal entry into naval shipbuilding, and the new Naval Systems segment has already contributed €77m in revenue at an EBIT margin of roughly 10%. CEO Armin Papperger used the quarterly update to lay out an audacious target: growing the marine business to €5bn in revenue by 2030, while lifting the group’s value-add share from around 30% to 50%.

The ambition does not stop there. German Naval Yards is in the sights for a potential acquisition, with due diligence expected to begin shortly. Papperger pointed to tangible early milestones — steel cutting, launchings and the christening of the corvette “Lübeck” — as evidence that the shipyard strategy is already delivering.

The Cashflow Conundrum

Where the revenue story disappointed, the margin story impressed. Operating profit climbed 17% to €224m, pushing the operating margin from 10.5% to 11.6%, comfortably ahead of consensus estimates. Earnings per share improved to €2.18.

Yet the headline that rattled investors was the free cashflow. The operating cashflow swung to an outflow of €285m, against expectations of a €181m inflow. Papperger attributed roughly €200m of the shortfall to finished truck deliveries that customers had scheduled for later quarters — a timing issue rather than a demand problem, he stressed.

The order book tells a different story entirely. Backlog swelled 31% to a record €73bn, providing exceptional revenue visibility. The group’s full-year guidance remains unchanged: revenue of €14bn to €14.5bn, implying growth of 40% to 45%, and an operating margin of 18.5% to 19%.

A Pipeline That Keeps Growing

Papperger signalled that the second quarter could bring a wave of new business, with nominations totalling around €20bn. These include a loitering munition contract worth roughly €2bn, a main battle tank deal in Italy, and a Lynx programme in Romania that is in final negotiations. The F126 frigate programme, which Papperger values at more than €10bn, could also be signed in the coming months.

The analyst community remains broadly bullish. Banco Santander upgraded to “Outperform” with a €1,735 target, while Morgan Stanley reiterated its “Buy” recommendation with a €2,500 price objective. Citi sticks with “Hold” at €1,480, citing political risks. The average analyst target stands at €2,144, implying significant upside from current levels.

A Dividend Signal

On May 12, Rheinmetall will hold its virtual annual general meeting, where shareholders will vote on a proposed dividend of €11.50 per share for the 2025 financial year, up sharply from €8.10 the prior year. CFO Michael Schiefer confirmed that Moody’s has affirmed the Baa1 rating with a positive outlook.

The dividend increase sends a signal of confidence, but it does little to address the immediate market concern: can production capacity scale fast enough to convert the €73bn backlog into recognised revenue? The first quarter’s revenue miss and cash drain suggest the answer is not yet clear. For a sector that has enjoyed a sustained rerating on the back of geopolitical tailwinds, the margin for error is shrinking. Record orders alone no longer suffice — the market wants delivery.