Russia Links Weigh on Rheinmetall as Frankfurt Visits Suffer

Aug 07, 2014 7:41 am ET

(Updates with training-center capabilities from seventh paragraph, comments from analyst in ninth, government in 11th.)

Aug. 7 (Bloomberg) -- Rheinmetall AG fell the most in a year after revealing the impact of losing a defense deal with Russia due to the Ukraine crisis, while Frankfurt Airport’s owner saw retail sales slump as travel from Moscow declines.

Rheinmetall reduced its 2014 profit forecast by 30 million euros ($40 million), two-thirds of that stemming from Germany’s blocking of the military training center contract. Fraport AG cut its retail outlook after the number of Russians departing Europe’s third-busiest hub fell 3.8 percent in the first half.

“Political relations between the Western nations and Russia have deteriorated significantly,” Rheinmetall said today. “This is particularly evident from the economic sanctions that the U.S. and the European Union have adopted over the past few weeks. The German government has gone a step beyond these sanctions. This directly affects the defense sector.”

Companies from brewer Anheuser-Busch InBev NV to sporting- goods maker Adidas AG are counting the cost as tensions with Russia over the annexation of Crimea and loss of an airliner thought to have been shot down by pro-Moscow Ukrainian rebels weigh on demand or prompt governments to curb business links. Herzogenaurach, Germany-based Adidas said today it plans to close stores and delay expansion in Russia, after previously planning to end the year with more than 100 net openings there.

Deal Off

Germany said more than four months ago it would suspend Rheinmetall’s training-center deal as sanctions were applied following the Crimea annexation, with the Dusseldorf-based company’s stock falling 4 percent on March 20. The move broke ranks with sanctions in other European Union countries that have focused on preventing new deals being struck with Russia.

It was revealed Aug. 4 that the contract had been scrapped completely, with Rheinmetall disclosing the value of the loss today, sending the stock down 9.6 percent, the worst intraday slump since July 30 last year. Shares of the maker of canons for the Leopard 2 tank traded 5.3 percent lower at 39.75 euros at 12:34 p.m. in Frankfurt, taking this year’s drop to 11 percent.

Rheinmetall’s 190 square-mile Russian project in Mulino, 200 miles east of Moscow, was slated to be completed this year and become “the world’s most advanced simulation-supported military training area,” according to the company.

Orders in Doubt

Combining sensors and laser guns with real-life equipment, the facility was due to provide live combat simulation, commander training and marksmanship on state-of-the-art firing ranges, setting “new standards” for the 30,000 soldiers scheduled to pass through each year.

“As far as their defense business is concerned, investors may now be wondering how certain expected orders from countries in regions like Northern Africa or the Middle East are,” said Adrian Pehl, an analyst at Equinet AG in Frankfurt. “Export permissions into regions where problems may arise could be granted less freely, and exporters are betting on some of these regions to make up for more muted opportunities in western markets where defense budgets are being cut.”

Germany signaled April 2 that it may approve the delivery of as many as 1,200 of Rheinmetall’s Fuchs armored vehicles to Algeria to help patrol the north African nation’s border.

Rheinmetall said it will “utilize all available legal options for minimizing the financial burden” stemming from the cancellation of the Russian contract. German Vice Chancellor Sigmar Gabriel said today that the company now has “legal certainty” over the issue, as compensation is discussed.

Big Spenders

Lawmakers are lobbying the government to pressure France to halt delivery of a Mistral helicopter carrier to Russia in October under a 2011 contract. President Francois Hollande has held out the prospect of canceling the sale of the second ship.

Frankfurt Airport operator Fraport meanwhile said today it expects the performance of its retail arm -- a business that can deliver two-thirds of earnings at top hubs -- to be flat in 2014 as Russians who are among the most lucrative passengers travel less. It had earlier suggested that full-year sales and operating profit at the division would show a “slight rise.”

Frankfurt’s retail revenue per passenger tumbled 5.8 percent to 3.22 euros in the second quarter, the lowest in almost two years, according to a presentation. Fraport shares traded 2.4 percent lower at 48.09 euros.

As the conflict in eastern Ukraine deepens, fewer Russians are taking flights through western Europe’s major airports, with those still traveling spending less after the ruble hit a record low of 51 to the euro on March 14, two days before the Crimea’s vote for rule from Moscow.

Frankfurt’s retail revenue declined 3.3 percent in the first six months as the airport also attracted 3.5 percent fewer Brazilians and 16 percent fewer Japanese, who like Russians tend to spend more than the average passenger.