Velocity Composites: A Leveraged Play on Defense Growth Amid Contractual Strength

The global defense sector is experiencing a renaissance, fueled by geopolitical tensions, modernization programs, and rising government spending. Nowhere is this more evident than in the UK, where Prime Minister Rishi Sunak’s pledge to raise defense spending to 2.5% of GDP by 2030 has created a fertile environment for contractors like Velocity Composites Plc (GB:VEL). The company’s recently renewed three-year contract with BAE Systems, its longest-standing partner, marks a pivotal milestone—securing revenue visibility, reinforcing its position in critical aerospace programs, and positioning it to capitalize on margin improvements that could finally silence skeptics.

The BAE Deal: A Foundation for Revenue Stability

Velocity’s renewed BAE contract, effective May 12, 2025, is far more than a routine extension. The deal’s terms reflect a strategic evolution:
- Price adjustments for inflation: A critical win for Velocity, as rising labor, energy, and financing costs are now offset via pre-agreed indices. This shields margins, a stark contrast to FY23 when inflationary pressures led to a £1.6M EBITDA loss.
- Scope expansion: Velocity continues supplying composite material kits for BAE’s F-35 and Typhoon programs, while also managing inventory and process improvements at BAE’s Samlesbury site. This deep integration reduces supply chain risks for BAE and ensures Velocity’s role as a “mission-critical” partner.

The contract’s three-year span aligns perfectly with the UK’s defense spending ramp-up. With BAE Systems as the primary contractor for UK and international fighter programs, Velocity’s role in these projects becomes a direct beneficiary of government funding. Crucially, the deal’s financial terms contribute to FY25 revenue stability, a key factor for investors wary of the company’s past cash flow volatility.

Sector Tailwinds: Defense Spending and Beyond

The UK’s defense budget isn’t the only tailwind. Velocity’s dual focus on aerospace and advanced materials opens doors to broader opportunities:
- Global defense demand: U.S. and European militaries are upgrading arsenals, with BAE itself winning contracts like the $727M U.S. Army tank ammunition deal. Velocity’s expertise in lightweight composites—a must for modern aircraft—positions it to supply not just BAE but other OEMs.
- Adjacent markets: The company’s material optimization tech, proven in aerospace, is now targeting wind energy (turbine blades) and urban air mobility (electric vertical takeoff vehicles). These markets align with global decarbonization goals, offering diversification beyond traditional defense.

Margin Improvements: Turning the Corner?

Skeptics have long pointed to Velocity’s cash flow challenges and historical losses. Yet FY24’s results show progress:
- Revenue surged 40% to £23M, driven by contract renewals with inflation-linked pricing.
- Adjusted EBITDA turned positive to £0.4M, up from a £1.6M loss, as gross margins expanded 710 bps to 25.9%.
- Net cash position improved to £0.7M, easing liquidity concerns.

These metrics suggest Velocity is finally executing on its strategy. The BAE renewal and other similar deals (e.g., U.S. contracts) embed operating leverage: fixed costs are spread over higher volumes, while inflation adjustments protect profitability. Management’s focus on standardizing production processes—reducing material waste and improving efficiency—adds a further margin buffer.

Why Spark’s Neutral Stance Misses the Big Picture

TipRanks’ Spark tool rates GB:VEL as “Neutral,” citing near-term cash flow risks. But this overlooks three critical factors:
1. Contractual momentum: The BAE deal and expanding U.S. agreements (not detailed in public filings but hinted at in investor calls) create a multi-year revenue runway.
2. Strategic diversification: Forays into wind and urban mobility are nascent but capitalize on existing tech, reducing reliance on cyclical defense spending.
3. Valuation upside: With a market cap of £12.7M and FY25 revenue likely exceeding £25M+, Velocity trades at a fraction of its peers’ multiples.

The Case for Immediate Action

Velocity Composites is at an inflection point. The BAE renewal and broader sector tailwinds provide a low-risk foundation for growth, while margin trends and new market entries offer high upside potential. Investors should view the current “Sell” technical sentiment as a buying opportunity—a chance to stake a claim in a company poised to benefit from both defense modernization and the global shift to advanced materials.

With a renewed contract in hand, Velocity is no longer just a supplier to BAE—it’s a leverage play on the entire aerospace and defense supply chain. For investors willing to look past short-term noise, the path to sustained profitability is clearer than ever.

Disclosure: This analysis is for informational purposes only and not financial advice. Readers should conduct their own research or consult a financial advisor.