By Florence Loeve and Tim Hepher

Tank maker KNDS's delayed IPO has underscored growing unease over the defence industry's ability to keep pace with Europe's rapid rearmament drive - with key peers such as Rheinmetall XETR:RHM and CSG EURONEXT:CSG seeing their shares slide this year even as governments accelerate military spending.

The Franco-German firm postponed its IPO plan this week, citing a volatile market hit by the Iran war. Rivals like Germany's Rheinmetall and CSG, which went public earlier this year, are down over 30% and 57% this year respectively.

"From a market sentiment perspective, it is a terrible time to IPO," said Morningstar equity strategist Michael Field, noting weakened interest from investors linked to the Iran war.

The conflict and the ongoing war in Ukraine have highlighted the importance of cheap, mass-produced drones, curbing some enthusiasm for traditional equipment.

"It's a logical decision," he said, referring to the KNDS delay, while adding that geopolitical uncertainty and pressure from U.S. President Donald Trump should see NATO countries increase their military spending targets.

KNDS had published its intention to float just a week earlier and was expected to go public on the Frankfurt and Paris stock exchanges in coming weeks. It will now restart the plan "upon the return of more favourable market conditions".

INVESTOR CONCERNS OVER DEFENCE COMPANY EXECUTION

Defence firms face concerns about their capacity to deliver after governments drastically increased their military budgets, taking the wind out of a stock rally since war began in Ukraine.

Rheinmetall suffered a particular setback with its shares falling by as much as 20% last month after Germany abandoned the delayed F126 frigate programme, switching to the smaller TKMS XETR:TKMS Meko line.

German tank supplier Renk's stock XETR:R3NK has fallen 14% this year.

Industry analyst Sash Tusa of Agency Partners noted the "clear underperformance" this year of comparable shares in CSG and Rheinmetall, adding to concerns about the defence industry's ability to keep up with Europe's push for re-armament.

"Broader investment concerns have emerged about companies underperforming in execution terms, relative to their very strong order backlogs and market potential," he said.

The issue is expected to reach the agenda for a NATO summit in Ankara next week. The alliance is expected to announce major new arms contracts but officials have expressed frustration that production has not increased at the pace they hoped.

Analysts believe there is still room for progress for European defence stocks to recover, however.

The wider STOXX European defence index has already started to tick up in recent weeks after a sharp slide earlier in the year, helped by firms more focused on defence systems.

"There are a lot of misconceptions with defence at the moment, because it's a relatively new sector (in Europe)," said Field, adding that investors saw the sector as "volatile".

Jefferies analysts said in a note last month that despite the conviction of some investors that newer technologies like drones would displace tanks, they saw space for both.

WHEN COULD KNDS RESTART IPO?

KNDS did not say when it would resume the IPO, with analysts estimating it could be pushed to the end of 2026 or 2027.

"I don't think it's going to be next month or something," said Field, adding that a positive catalyst may be needed for investors to look upon the sector more favourably.

"It could be in the fourth quarter of the year maybe, or it could be next year."

KNDS is currently joint-owned by the French government and the German family owners of the former Krauss-Maffei Wegmann (KMW). KMW was ​merged with France's Nexter ​into KNDS.

The families, which have agreed to sell 40% to the German government, ⁠aim to divest the remaining 10% with the help of the IPO but were reported earlier this week to have qualms about the valuation in current conditions.

The families are "not in a hurry" to act, a person familiar with them said, though some analysts warn defence valuations may struggle to return to their Ukraine war peak any time soon.

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