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Biden Meets Zelenskyy Reading Between the Lines

What could it mean for investors?

A little bit on how it started:

It isn’t very much history, as the flame of war is very much alive, and it seems to combust ever so lively ever since Russian President, Vladimir Putin, launched Russia’s first assault on Ukraine on February 24th, 2022.

Ever since then, many means of stopping, or at least choking Russia’s advances were made by the west, including the U.S.. It is no secret where both sides stand in the global geopolitical spectrum.

Russia, on one hand, is a staunch critic of what he claims is a western dominion over global affairs — an act akin to dictating how other sovereign countries are supposed to act, be it on political, economic, or even social issues.

In the political spectrum, Putin alleges that Ukraine was the one who incited the war, by provoking the Kremlin’s fear over the contested Donbas region, while Russia was merely trying to stop any escalation by use of force.

According to Putin, the western world (America, to be exact), has been growing rather ‘narcissistic’ in the geopolitical spectrum.

“(America) think of themselves as exceptional. And if they think they’re exceptional, that means everyone else is second class,” — Vladimir Putin, reported by NPR.

Ukraine, on the other hand, is a strong ally of the North Atlantic Treaty Organization (NATO), an alliance of a few countries (including the U.S.) that focuses on the issue of regional security and military operations.

The NATO-Ukraine relationship is acknowledged by NATO itself.

“NATO condemns in the strongest possible terms Russia’s brutal and unprovoked war of aggression against Ukraine — which is an independent, peaceful and democratic country, and a close NATO partner.” — NATO

To cut it short, Russia is at war with Ukraine, and much of the western world is on the Ukrainian side. Helps were given in many forms, including military equipment.

The meeting:

On February 20th, 2023, the President of the United States (U.S.), Joe Biden announced in an official statement that he was in Ukraine, and is meeting with the Ukrainian president, Volodymyr Zelenskyy.

In the statement, Biden made clear that the U.S. is firm with its stance on the Russia-Ukraine war, that it stands with Ukraine, and is willing to assist Ukraine as the war still rages on.

“I am in Kyiv today to meet with President Zelenskyy and reaffirm our unwavering and unflagging commitment to Ukraine’s democracy, sovereignty, and territorial integrity.” — Joe Biden

This meeting reiterates the usual sentiment, that the U.S. stands with Ukraine, and will unwaveringly stand on that hill. What does it mean for the market?

A promise of aid:

The most striking part of the whole deal is not very much on the act of diplomacy, at least not in the context of this article. The most interesting part of the whole transaction is how Joe Biden committed to providing more aid to Ukraine.

These aids come in the form of critical equipment, whereby quoting Biden himself, some of this equipment are artillery ammunition, anti-armor systems, and air surveillance radar.

According to the U.S. Department of State (DoS), as per published on February 3rd, 2023, the U.S. has allocated as much as $29.8 billion to Ukraine since the Russian attack.

This upcoming aid will be around $2 billion in value, in which according to a press release by the U.S. Department of Defense (DoD).

An interesting aspect of this military aid is that it is being provided under the Ukraine Security Assistance Initiative (USAI). Why is it so significant?

To make it clear, there are a few aids initiatives concerning Ukraine, the first one is called the Presidential Drawdown (PDA), it is where the DoD allocates aid to Ukraine from the U.S. own arsenal, I.e., by taking the U.S. military’s own requirements and send it to Ukraine. This method is a much faster way to deliver equipment to Ukraine, as most are readily available.

Another imitative is the USAI, which is an initiative in which the government will procure all of these assets to be handed to Ukraine. In short, the U.S. government will be looking to purchase the equipment from their manufacturers, which may take some time before delivery could be completed.

On another note, it means revenue for the companies involved with this equipment.

“…as you highlight, given that these are USAI, these are all capability that we will go to industry to help produce.” — Brigadier Gen. Patrick S. Ryder, U.S. DoD Press Secretary

Equipment promised:

As promised by Biden, the equipment will mainly cover on delivery of artillery ammunition, anti-armor systems, and air surveillance radar. Here are among the equipment that the DoD listed (do note that the exact amount and details were not provided):

1. Ammunition for High Mobility Artillery Rocket Systems (HIMARS)

HIMARS is a multiple-rocket launcher developed by Lockheed Martin Missiles and Fire Control, one of four core businesses by Lockheed Martin (NYSE: LMT).

Hence, not surprisingly, its ammunition, either the six-pack Ground Multiple Launch Rocket System (GMLRS) rockets with a range of around 70–150km and a one-slot Tactical Missile System (TACMS) missiles that can cover up to 300km, and the Precision Strike Missile (PrSM) that can go up to 499km, are all produced by Lockheed Martin.

HIMARS is one of the most reliable pieces of equipment that a side can have in a war, it’s mobile, with commendable accuracy, and somewhat lightweight. The full M142 HIMARS system comes at the price of $3.48 million as of 2014.

Based on the 2021 Congressional Research Service (CRS) paper, Its ammunition, the GMLRS is at around $140,000 each, and there are 6 slots for it in a HIMARS. Now, that’s just for the GMLRS, the TACMS is around $1 million each, while the PrSM is around $1.2 million each.

Given that the U.S. does not allow Ukraine to launch attacks into Russian territories, the latter two pieces of ammunition can be eliminated from the list of possible assets to be delivered. As to how many of these will be delivered, Ukraine currently has at least 20 HIMARS, according to The New York Times.

If hypothetically, each HIMARS is only to be fully equipped only once, Lockheed Martin is looking at a deal of around $16.8 million — and that is only if each HIMARS is equipped to only be able to have full rounds only once.

2. 155mm artillery rounds

Based on a fact sheet provided by the DoS, the U.S. has provided Ukraine with 160 Howitzer to date. Howitzer is an artillery weapon that is somewhere in between a cannon and a mortar, which is equipped with 155mm artillery rounds.

According to the same fact sheet, so far, the U.S. has provided Ukraine with 6,000 155mm artillery rounds. As for who exactly makes it, it is quite hard to pinpoint who does what, since there are a few companies that are capable of manufacturing the 155mm rounds.

However, according to The Ukrainian Military Centre in December 2022, the contract to manufacture 155mm artillery rounds were awarded to three companies, one of it is General Dynamics Ordnance and Tactical System (GD OTS), a business unit under General Dynamics (NYSE: GD). Other two are private companies: American Ordnance, and IMT Defense.

These contracts, despite not being directly attributed to the recent aid announcement, were made in lieu of the rising demand for 155mm rounds in light of the dire situations and consumptions in Ukraine.

According to Real Clear Defense, around 4,000 to 7,000 rounds are fired in Ukraine daily, and technology.org had a monthly estimate of around 90,000 artillery rounds per month, which is significantly lower than the previously mentioned daily statistics.

Defense Daily reported as of February 17th, 2023, that GD OTS is currently competing for bids against American Ordnance for a $993.8 million deal for 155mm productions. That is almost half of the total aid cost.

3. Munitions for laser-guided rocket systems

From previously disclosed documents, the laser-guided or precision-guided artillery is the 155mm, while the precision-guided rockets were also given.

In this context, we believe that the laser-guided rocket mentioned in the recent aid does not refer to the 155mm precision-guided, but a different one, since they are mentioned separately in the list.

We took guess that this rocket refers to the Advanced Precision Kill Weapon System (APKWS), which is manufactured by BAE Systems Inc, an American subsidiary of BAE Systems PLC, a British Company.

Interestingly, BAE Systems PLC is also traded on Over-the-counter (OTC) markets (OTCMKTS: BAESY), in which BlackRock Investment Management LLC is one of the main shareholders, with 0.03% shareholdings at around 217,629 shares, valued at around $9.18 million. Blackrock Investment Management LLC is part of BlackRock Inc. (NYSE: BLK).

So, if you’re thinking of investing in them, you could either go to the OTC market, or go for BlackRock Inc., but do note that BlackRock’s revenue may not be heavily dependent on BAE’s performance, given the scale of BlackRock’s portfolio.

Now, how much could APKWS bring in? A unit of APKWS is around $22,000. On May 2023, the Pentagon confirmed its supply of $22.6 million worth of APKWS to Ukraine. One could only take a guess on the units to be delivered, but if the amount is somewhat close to the May aid, we could be looking at quite good money for BAE Systems — and a good supply of rockets for Ukraine.

4. CyberLux K8 UAS

The K8 UAS is an Unmanned Aircraft System produced by CyberLux (OTCMKTS: CYBL), a company that is listed in the Over-the-counter market (OTC).

So far, there is little to no information on how the K8 UAS will be, but CyberLux is a company known for producing industrial/commercial/military grade drone fitted with cameras for surveillance. However, there is no saying as to how the drone will be fitted.

Thus, we are unable to aggregate how the delivery of the K8 UAS will impact CyberLux’s performance.

5. Switchblade 600 UAS

The Switchblade 600 is not unknown to the battlefield in Ukraine. Around September 2022, the U.S. have allocated $2.2 million for the delivery of 10 Switchblade 600 units to Ukraine.

From said allocation, it could be approximated that a single unit of the Switchblade 600 will grant AeroVironment (NASDAQ: AVAV) around $220,000. That is 1/5 of a million dollars for a drone that can only be used once, before blasting itself along with its targets.

That does sound like a good deal for AeroVironment.

6. Altius-600 UAS

The Altius-600 UAS is a surveillance and reconnaissance drone manufactured by Area-I, a company under Anduril, a startup defense company founded by Palmer Lucky, which is not yet publicly traded (nor is there any indication that they are planning to do so).

Based on the record that was published, the U.S. government allocated around $30.5 million to Area-I, but that bulk is for the development and testing of Altius, not solely for the acquisition of a single unit of Altius.

7. Jump 20 UAS

The Jump 20 UAS is another drone provided by AeroVironment (NASDAQ: AVAV). The Jump 20 UAS is a surveillance & reconnaissance that can travel up to 185km from its central control.

This drone can run for 14 hours with a range of more than 185km, and it is equipped with multi-sensor intelligence capabilities, making the price quite more justifiable.

In 2020, the U.S. military paid around $8 million for a Jump 20 UAS system which includes 6 air vehicles, ground data terminals and ground control stations.

8. Counter-UAS and electronic warfare detection equipment

There have been not many details provided regarding this matter, there was not even any mention of what type of system will be deployed to Ukraine.

However, looking into the previous convictions which the U.S. have undertook, L3Harris (NYSE: LHX) was awarded with a $40 million contract to supply 14 Vehicle Agnostic Modular Palletized ISR Rocket Equipment (VAMPIRE) along with other equipment that enable ground forces to shoot down Russian drones.

There is no clear indication as to who will receive the current contract, nor what equipment will be deployed. However, if one is to take a guess. That could be a possibility.

9. Mine clearing equipment

There is no details on what sort of mine clearing equipment was sent to Ukraine. However, looking into Biden’s previous aids, the mine clearing equipment that was sent before was a Mine Resistant Ambush Protected Vehicles (MRAP), which is a type of vehicle that is resistant to mine blasts, and is capable of being equipped with mine rollers.

The kind of MRAP that was sent was Maxxpro MRAP, a line of MRAP produced by Navistar, a once U.S. publicly traded company but currently is acquired by TRATON GROUP, which is listed in Nasdaq Stockholm and Frankfurt Stock Exchange.

10. Secure communications support equipment

There is also not much details provided on what type of communication support are we talking about here. However, on the issue of secure communication support equipment, Ukrainian army was pictured as to have used the Harris AN/PRC-152, a kind of handheld radio produced by L3Harris (NYSE: LHX).

 

However, that is only as good a speculation can go. There is still no clear indication as to what equipment are being referred to when Biden announced the additional aid.

Other companies to look at:

To be clear, many of the companies listed above are based on estimates. There could be other companies which provide similar equipment. Here are a few companies which are also known for providing military equipment to the U.S. Government:

Bottom line

The Russia-Ukraine war is not seeing an end anytime soon, while western interest over the region is also ever solidifying, given how strategically placed Ukraine is between Russia, Europe, and NATO’s allies.

Even if the war is to suddenly halt, the U.S. is not going to halt down its equipment development and manufacturing. The world is currently strained with discontent. A lot of things can still go wrong, say, China-Taiwan relationship. The U.S., if anyone else, is well-aware on the tension within the geopolitical realm.

Thus, one can expect that consumption may drop in terms of aids to Ukraine (if war halts), but preparatory moves will most likely continue, especially in the Asia-Pacific region.

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