Two All Ordinaries Index (ASX: XAO) ASX defence shares are among a select basket of stocks "poised to thrive in the coming decade".
That's according to the fund managers at Tamim Asset Management.
The All Ords ASX defence shares in question are DroneShield Ltd (ASX: DRO) and Codan Ltd (ASX: CDA).
Now, both stocks have already been shooting the lights out.
The Codan share price has soared 60% over 12 months and is up 40% so far in 2024.
The DroneShield share price has rocketed an eye-watering 532% over 12 months and is up 301% year to date.
To put that in some perspective, the All Ords has gained 10% in 12 months and is up 2% in 2024.
Looking ahead, both ASX defence shares stand to be among the bigger beneficiaries of the AI revolution.
But that's not why Tamim believes they'll thrive over the next 10 years.
That investment rationale relates instead to their direct links to the global defence industry.
Government spending tailwinds
Successful international and ASX defence shares have some significant advantages over companies operating in other sectors due to the nature of government defence spending.
As Tamim pointed out, "substantial government spending provides a consistent revenue stream" for these companies.
Pointing to the defence budgets of the United States and Australia, the fund manager noted, "Government spending on defence remains robust, driven by the need to maintain national security and technological superiority."
Atop those big spending packages, international and ASX defence shares also tend to benefit from long-term government contracts, providing investors with some security over next year's revenue stream.
"By recognising these dynamics, investors can uncover quality businesses with strong tailwinds poised to thrive in the coming decade," Tamim said.
All Ords ASX defence shares well-positioned to capitalise
Tamim highlights DroneShield, a leading provider of counter-drone and multi-mission unmanned systems solutions, as one of the promising players in the Australian defence sector.
The All Ords ASX defence share employs AI and machine learning to deliver advanced technologies for military, government, and commercial organisations in more than 70 countries.
According to Tamim:
In the most recent quarterly report, DroneShield reported incredible financial results for the first quarter of 2024, with revenue growing 10 times year-over-year and a significant increase in order intake.
The company has also expanded its global footprint, securing major contracts with military and government agencies, particularly in the US. Over the past 12 months, DroneShield's share price has rocketed, reflecting the growing demand for counter-drone solutions and the company's successful execution of its strategic initiatives.
As the threat of drone-related incidents continues to rise, DroneShield is well-positioned to capitalise on the increasing need for effective counter-drone technologies.
Tamim is also bullish on the outlook for Codan.
Codan develops rugged electronics solutions for government, corporate and consumer markets worldwide.
According to Tamim:
The company's communications segment produces equipment used by military, law enforcement, humanitarian, and commercial organisations known for reliability and performance in harsh environments, making them ideal for defence applications.
Codan's focus on innovation and quality ensures it remains a trusted supplier in the defence communications market. The company's technologies also include metal detection…
On the performance front, the fund manager added:
The company delivered a strong H1 FY24 result, with group revenue up 26% to $265.9 million and net profit after tax increasing 24% to $38.1 million compared to the prior corresponding period.
The Communications segment achieved 12.5% revenue growth, while Metal Detection revenues surged 49%.
Despite higher expenses due to acquisitions and investments, earnings before interest & tax (EBIT) and net profit after tax (NPAT) grew 31% and 24% respectively. Net debt increased to $82.5 million after funding $30.3 million for the Eagle and Wave Central acquisitions.
Looking ahead, Tamim noted that the ASX defence share expects its Communications revenue growth to exceed the top end of its 10% to 15% target range.
