TKMS: A Record Backlog Meets a Cashflow Reality Check

TKMS delivers final Dolphin sub to Israel, but shares fall 9% amid cash flow squeeze despite record order book and raised guidance.

The INS Drakon slipped out of Kiel harbour on 1 September carrying more than just the weight of its 550-million-euro price tag. As the third and final submarine in Israel's Dolphin class — and the largest vessel of its kind built in Germany since the Second World War — its departure closes a chapter that began with construction back in 2012 and formally concluded with handover on 22 July. Ceremonies aside, the delivery lands at an awkward moment for Thyssenkrupp's naval arm, whose shares have been drifting away from the highs they touched barely a month ago.

Investors have watched TKMS shed roughly 9 percent over seven trading sessions, leaving the stock near 82.90 euros against a 52-week peak of 108.80 euros set in August. The pullback has a familiar rhythm to it: the company's operational story keeps improving, yet the market keeps marking the equity down.

That disconnect was on full display when TKMS reported first-quarter figures on 12 August. Revenue for the first nine months of fiscal 2025/26 reached 1,890 million euros, up 19 percent, while adjusted EBIT climbed 13 percent to 110 million euros. The submarines segment quadrupled its adjusted result to 46 million euros as higher-margin newbuild projects steadily displaced legacy burdens from older contracts. Atlas Elektronik, the group's sonar and electronics subsidiary, saw revenue jump 28 percent. Management responded by lifting full-year guidance, now pointing to revenue growth of 10 to 12 percent against a prior range of 2 to 5 percent, with an EBIT margin of up to 6.5 percent.

The order book tells an equally buoyant story. At 20.1 billion euros, it stands at a record level, underpinned by a pipeline that includes Canada's prospective twelve-submarine programme, four MEKO A-200 frigates for the German navy with options for four more, and a cooperation agreement with Spain's Navantia. TKMS has transformed from a drag on the Thyssenkrupp conglomerate into one of Europe's most visible defence winners.

Yet the balance sheet carries a wrinkle the income statement does not. Free cash flow swung to minus 204 million euros over the nine-month stretch, against plus 631 million euros in the comparable period a year earlier. Management attributes the outflow to anticipated payments tied to contract execution across major programmes — a plausible explanation for a shipbuilder in the middle of an unprecedented order surge. Markets, however, tend to fixate on the sign in front of the number rather than the footnote beneath it.

The Drakon delivery adds a geopolitical layer to the valuation debate. Germany's arms exports to Israel reached nearly 800 million euros in the first half of the year — four times the total for all of 2025 — with two-thirds of those approvals tied to the submarine project. Berlin lifted its weapons embargo against Israel in November 2025, and cooperation has since widened to include a first-ever test of an Israeli LORA missile from a German Baden-Württemberg-class frigate, described by a vice-admiral as a historic success.

For bulls, the intensifying German-Israeli relationship signals political tailwind that could benefit TKMS in future naval tenders, from Arrow-3 systems to follow-on maintenance and retrofit work. The Dolphin class is formally complete with three boats delivered, but the diplomatic momentum suggests the partnership may outlive the programme that cemented it.

Bears counter that the export approvals merely sanction a programme already underway rather than herald new orders. The share price, sitting 24 percent below its high, suggests the market has already begun repricing the story. A relative strength index of 39 points to fading buying pressure, though not necessarily a trend reversal. Political friction adds another variable: critics on Germany's left continue to question arms shipments to Israel, which could complicate future approval rounds.

Analysts, for now, see more substance than the tape reflects. Bankhaus Metzler raised its price target on 13 August from 105 to 115 euros, reaffirming a buy recommendation on the strength of the recent order wave and improved medium-term prospects. The gap between that target and the current share price implies the recent weakness owes more to sentiment than fundamentals.

The central question for shareholders is whether the Drakon marks a finale or a prelude. A confirmed follow-on order emerging from the German-Israeli cooperation dynamic over the coming months would settle the debate; no such announcement exists yet. Until then, TKMS trades as a company whose record backlog, rising margins and political tailwinds are fighting a cashflow squeeze and the market's impatience with growth pains — a tension unlikely to resolve before the next quarterly report lands.