AFRY's Strategic Defense Deal: A Catalyst for Growth in European Defense Modernization

The recent five-year engineering services agreement between AFRY AB and BAE Systems Hägglunds marks a pivotal moment in Europe's defense sector. This deal, worth an estimated SEK 150–200 million annually, positions AFRY as a critical partner in modernizing military hardware like the CV90 infantry fighting vehicle. But beyond its immediate financial implications, the partnership underscores a broader trend: the deepening reliance on specialized engineering firms to fuel Europe's defense modernization. For investors, this dynamic presents both opportunities and risks worth scrutinizing.

The Strategic Imperative: Defense Modernization in Europe

Europe's defense spending has surged since the Russia-Ukraine war, with NATO members pledging to spend 2% of GDP on defense by 2030. Countries like Sweden, a non-NATO member, are accelerating modernization to deter threats. BAE Systems Hägglunds' CV90 program exemplifies this shift—upgrading the vehicle's capabilities to meet next-gen warfare demands, such as enhanced cybersecurity and autonomous systems.

AFRY's role here is critical. The Stockholm-based engineering firm will manage engineering development, procurement, and production support for the CV90, leveraging its 18,000-strong team of experts. This isn't AFRY's first defense rodeo: the company has partnered with BAE on projects since at least 2024, including cybersecurity upgrades for the CV90. The new deal, however, marks a deeper integration, with AFRY establishing a dedicated project office in Trollhättan and Gothenburg employing 100 engineers.

Why This Deal Matters for Supply Chain Dynamics

Defense supply chains are notoriously complex, requiring precision engineering and cross-functional collaboration. AFRY's ability to streamline BAE's workflows—enhancing productivity and efficiency—could set a template for future partnerships. For example, by centralizing engineering oversight, AFRY may reduce bottlenecks in design and production, enabling faster delivery of upgraded systems.

This is particularly valuable as European defense projects increasingly emphasize domestic sourcing. AFRY's Nordic roots and pan-European expertise align with EU goals to reduce reliance on U.S. or Asian suppliers. The company's sustainability focus—critical for green defense initiatives—also positions it to capture emerging contracts focused on eco-friendly military tech.

Growth Opportunities: AFRY's Play in a Booming Sector

The European defense market is projected to grow at a 3.5% CAGR through 2030, driven by modernization and NATO commitments. AFRY's expertise in systems engineering, procurement, and digital solutions makes it a natural beneficiary. Beyond BAE, the firm could expand into partnerships with other European defense giants like Rheinmetall or Leonardo, especially as cross-border collaborations become more common.

The CV90 program alone offers scalability. With over 2,000 CV90 units deployed globally, upgrades to existing fleets could generate recurring revenue. AFRY's program management role also opens doors to high-margin engineering services for other platforms, such as Sweden's new H32 combat aircraft or Germany's Leopard 3 modernization.

Investment Considerations: Valuation and Risks

AFRY's stock has underperformed BAE and the broader defense sector in recent quarters, partly due to macroeconomic uncertainty. However, the BAE deal's stability (a five-year framework) and its visibility into future revenue could catalyze a re-rating. Analysts estimate the deal adds ~2–3% to AFRY's annual revenue, with upside if project scope expands.

Risks remain. Geopolitical tensions could delay contracts, while cost overruns in defense projects are common. AFRY's reliance on a few major clients (BAE accounts for ~10% of its defense revenue) also poses concentration risk. Diversification into other sectors like energy or infrastructure remains key to long-term resilience.

Conclusion: AFRY's Strategic Positioning Deserves Attention

For investors seeking exposure to European defense modernization, AFRY offers a compelling entry point. Its technical expertise, partnership with a defense leader like BAE, and alignment with EU priorities make it a vital supplier in a growing market. While near-term risks exist, the CV90 deal underscores AFRY's ability to capitalize on structural trends. Investors with a multi-year horizon may find value in adding AFRY to a portfolio focused on defense and engineering innovation.

Investment Thesis:
- Bull Case: AFRY secures additional defense contracts in Europe, leveraging its BAE partnership. Stock climbs 20–30% on revenue visibility.
- Bear Case: Defense spending slows, or project delays hurt margins. Stock remains range-bound.
- Hold: Wait for clearer signals on contract wins beyond BAE and improved sector sentiment.

Stay tuned to AFRY's Q3 2025 earnings for updates on the BAE deal's impact—and the next phase of its defense journey.