The ASX stocks set to benefit from increased EU defence spending

EU defence spending set to surge

While traditionally shunned by ESG investors, the defence sector is increasingly viewed as compatible with ESG principles, particularly considering the war in Ukraine and its impact on global security. 

A recent study found that 94% of wealth managers now consider defence companies to be ESG stocks. 

Against this backdrop on renewed interest from ESG funds in defence, Germany has initiated a significant shift in its defence policy earlier this year, approving a €500 billion investment package aimed at modernizing its military and infrastructure. This move includes amending the constitutional "debt brake" to allow defence spending exceeding 1% of GDP without breaching fiscal constraints.

The decision reflects Germany's commitment to enhancing its role in NATO and addressing emerging security challenges.

This substantial investment will have a considerable impact on global defence companies. European defence firms, such as Rheinmetall and Airbus, are expected to benefit from increased procurement opportunities.

Investors and industry stakeholders should monitor these developments closely, as they may signal broader trends in defence spending and international security collaborations.

We examine three small cap ASX listed companies with European sales and/or operations contracts in defence and communications to see how they may benefit from increased German and EU defence spending.

Harvest Technology Group (ASX: HTG)

Harvest Technology Group is an Australian technology is addressing core connectivity issues that impact global companies operating where network infrastructure is unreliable and bandwidth limited.

Harvest Technology Group has developed “elegant”, scalable software engineering enabling mission-critical operations in the world's most challenging environments.

The Company has designed a proprietary protocol designed for resilience, efficiency, and security, already in use today by customers who cannot afford for their operations to fail.

Industries from maritime and energy to defence and healthcare increasingly require reliable real-time data transmission in environments where standard connectivity solutions falter. When monitoring offshore platforms, controlling uncrewed defence vehicles, or delivering remote medical care, connection failures can become catastrophic.

Traditional solutions typically require massive infrastructure investments or accept significant operational compromises. Harvest has engineered a fundamentally different approach.

At Harvest's core is its proprietary data transmission protocol, Nodestream™. This technology enables synchronised video, audio, and data transmission across extremely low-bandwidth networks with near-zero latency, without compromising quality or reliability.

The protocol's most valuable characteristic may be its resilience. If a connection drops, a common occurrence in remote environments, the system does not restart or require reconfiguration. It automatically resumes precisely where transmission paused, maintaining operational continuity even under severely degraded conditions.

Every transmission is secured with military-grade encryption, making the technology viable for the most sensitive defence and government applications where data security is non-negotiable.

Harvest Technology Group’s proprietary Nodestream™ protocol is powering a range of high-value, mission-critical operations across multiple industries. In defence and security, it enables the remote control of uncrewed vehicles, maintaining real-time human oversight even under adversarial or degraded network conditions.

In the energy and resources sector, it supports live inspections of offshore infrastructure by streaming synchronised video and sensor telemetry back to engineering teams onshore. Maritime operations benefit from multi-party situational monitoring, allowing coordinated responses with near-zero latency.

In remote healthcare, Nodestream™ enables the delivery of critical medical expertise to bandwidth-limited locations, ensuring patients receive continuous care despite poor infrastructure. The protocol’s ability to function in both point-to-point and multicast configurations makes it ideal for distributed teams requiring real-time collaboration.

This deployment flexibility, combined with software gross margins of approximately 90%, positions Harvest for efficient scaling across sectors and geographies. The company's market penetration is accelerating through strategic partnerships with established global resellers and systems integrators including Marlink, Pulsar Beyond, and ThreePro Consultants.

With a current market capitalisation of around A$ 10 million), Harvest represents an early-stage technology opportunity demonstrating considerable commercial traction. In FY2024, the company generated $A 2.7 million in revenue with recent performance metrics indicating accelerating growth: Q4 2024 revenue increased 32% to $A 672,000, cash receipts grew 37% quarter-on-quarter and EBITDA loss improved by 98%, reflecting disciplined cost management.

The company’s modest but early success in the demanding offshore and defence sectors lends significant credibility. Companies operating in these environments cannot afford solutions that merely work in controlled conditions, they require technology that performs reliably in the harshest real-world scenarios. The potential to scale into global markets where infrastructure is sparse or contested, presents a clear growth trajectory.

DroneShield Limited (ASX: DRO)

DroneShield Limited (ASX: DRO) is the world’s only publicly listed company focused exclusively on the fast-growing counter-drone (counter-UAS) sector.

DroneShield is a global leader in the counter-drone (C-UAS) space, offering proprietary, AI-powered solutions to detect, track, and defeat malicious or unauthorized drones.

As the only pure-play, publicly listed company in the sector (ASX: DRO), DroneShield provides investors with unique exposure to a market that is rapidly expanding in both scale and strategic importance—now estimated to be worth over US$10 billion globally.

The proliferation of drones has transformed security risks across military, government, and civilian domains. These threats range from surveillance and smuggling to armed attacks by non-state actors and state-sponsored warfare. DroneShield’s suite of technologies is purpose-built to mitigate these risks safely, reliably, and effectively.

At the core of DroneShield’s value proposition is its integration of innovative artificial intelligence, machine learning, and sensor fusion. The company’s hardware offerings include radar systems, radiofrequency detectors, jamming devices, and portable handheld counter-drone units. Supported by advanced software platforms such as DroneSentry-C2, which enables real-time threat detection, situational awareness, and response coordination across multiple locations.

DroneShield’s solutions are modular and scalable—adaptable for mobile, fixed-site, maritime, and airborne deployments. Defence and national security remain the primary use cases for DroneShield’s technology. The company serves a growing roster of Tier-1 military and government customers across the United States, Australia, NATO allies, and the Middle East. The Company’s systems are deployed to protect military bases, critical infrastructure, combat zones, and high-value public events.

DroneShield has also secured multi-million-dollar defence contracts and framework agreements with leading global defence and homeland security organizations.

DroneShield’s market cap at end of April 2025 stands around A$1.15 billion​ reflecting investor confidence in its growth trajectory. The stock has seen volatility but remains a top performer in the defence-tech sector, supported by rising global demand for counter-drone solutions.

DroneShield reported record revenue of A$ $33.5M in Q1 FY25, marking a 102% year-over-year increase, with SaaS revenue up 198% and cash receipts rising 135% to A$16.7M. Contracted revenue for 2025 stands at AU$94.4M, significantly higher than AU$57.5M in 2024.

Droneshield (ASX: DRO)

​Electro Optic Systems Holdings Limited (ASX: EOS)

​Electro Optic Systems Holdings Limited (ASX: EOS) is an Australian-based defence and space technology company specializing in advanced systems for military and aerospace applications. Founded in 1983 and headquartered in Canberra, EOS operates across Australia, the United States, Germany, Singapore, the UAE, and New Zealand and a headcount of around four hundred.

EOS focus is defence systems. This segment focuses on remote weapon systems (RWS), high-energy laser weapons, counter-drone systems (C-UAS), and integrated command, control, communications, and computing (C4) solutions. Notable products include the R400, R500, and R800 RWS platforms, as well as the "Slinger" and "Titanis" counter-drone systems.

In the fiscal year 2024, EOS reported revenues of A$ 176.6 million, a decrease from A$ 219.3 million in 2023. The company narrowed its net loss to A$ 18.7 million in 2024, improving from a A$ 33.3 million loss in the previous year.

A significant financial milestone was the divestment of EM Solutions in January 2025 for A$ 158.6 million. This sale enabled EOS to eliminate A$ 61.1 million in debt, resulting in a debt-free status and bolstering cash reserves to A$ 128 million.

Under the leadership of CEO Dr. Andreas Schwer, appointed in December 2023, EOS is concentrating on converting its robust pipeline of opportunities into revenue. The company is actively pursuing contracts in the defence sector. Additionally, EOS is expanding its presence in global defence markets, with recent contracts totalling over A$ 50 million in counter-drone and remote weapon systems.

As of April 29, 2025, EOS shares are trading at A$1.25, with a market capitalization of around $A 241 million. Analysts have projected a potential upside, with some analysts estimating an intrinsic value of A$ 2.38 per share.

Investors should note that while EOS has made strides toward profitability, challenges remain, including the long sales cycles inherent in the defence sector and the need for continued execution of its strategic initiatives. However, the company's strong cash position, debt-free balance sheet, and focus on high-demand defence technologies position it well for future growth.

The first quarter of 2025 has seen European defence stocks record a “blistering rally” (Financial Times, 24 April 2025) and we expect this investor interest to continue into dual-listed ASX defence stocks with European capability, supply or collaboration partners such as Harvest Technology Group, EOS and Droneshield.