Germany Cancels F126 Frigate Programme, European Defence Shares Extend Losses

European defence shares extended losses on Thursday after Germany scrapped the F126 naval programme, Cnbc reported. Rheinmetall shares fell 1 percent after an 18 percent drop the previous day. Hensoldt declined 3.5 percent and Renk fell 1.7 percent.

Germany announced on Wednesday it would buy eight Meko A-200 frigates from TKMS instead of six F126 frigates. The government cited significant project delays, cost increases and risks associated with changing the prime contractor to Rheinmetall. The Meko vessels would be capable of fulfilling the German Navy's core mission of anti-submarine warfare and meeting NATO obligations, the government said.

The F126 programme could have been worth more than 12 billion euros, with Rheinmetall expected to become the lead contractor. Jefferies analysts cut their price target on Rheinmetall by 31 percent to 1,300 euros and reduced expectations for 2030 revenue targets. Wednesday's share-price drop wiped out over 10 billion euros of the company's market capitalisation.

JP Morgan analysts led by David Perry said Germany will spend a lot of money on defence procurement in the next five-plus years and will buy significant amounts of land vehicles and ammunition from Rheinmetall. The same analysts noted that building warships is notoriously difficult. They added that governments can change their minds on procurement priorities.

A year ago NATO allies agreed to increase defence spending from 2 percent to 5 percent of GDP by 2025. Most other European defence companies traded lower on Thursday, while Saab and Rolls-Royce each rose less than 1 percent.