Broker tips: BAE Systems, Tesco, Dairy Crest

Analysts at UBS believe BAE Systems is in the right segments of the defence industry – aerospace and high-end technology – to capitalise on the increased emphasis on higher technology military operations.

That is manifestly the case when one looks at the recent 50 nations for Air Power operations to counter Islamic State (IS) in Iraq and Syria. BAE has the right mix of businesses to capitalise on them (51% Air, 25% Sea, 17% Land and 7% Cyber) UBS analysts think.

Furthermore, as a result of rolling forward its five-year profit forecasts to a fifth year its estimate of the five-year growth rate rises from 1.9% per annum to 2.2%, as the company moves further past the 2014-16 plateau in defence spending and more towards GDP-type growth towards the end of the decade.

For that reason the broker´s price target on the shares rises to 505p from 460p previously.

As well, the aerospace and defence manufacturer´s 4.4% dividend yield is decsribed as ´rock solid´.

On the basis of all of the above the Swiss broker maintains its 12-month 'buy' recommendation on the shares.

In a note to clients analysts at SocGen highlight the lack of detail provided to shareholders by Tesco´s management, with the company having offered no breakdown between the commercial income from suppliers and delayed accrual costs to explain its reduced profit guidance.

“At this stage, we are still finding it very difficult to understand what happened (significant accounting issues, poor practices with suppliers that might not be one-offs, lax internal control, governance),” the French broker goes on to add.

In the opinion of SocGen the retailer should follow the route taken by Carrefour when it traversed a similar situation three years ago and divest some non-core assets.

Averaging out a 20% discount to the European sector average and the discounted value of the company´s cash flows yields a price target of 190p for SocGen, which it maintains.

Under a worst case scenario, the UK trading margins would fall to 1.5% and earnings per share to 12.9p, implying a valuation of 150p.

That would be the threshold for viewing Tesco as a value stock, the broker concludes.

SocGen has reiterated its ´sell´ recommendation on the shares.

Despite the losses incurred at its Dairies division during the first half of fiscal year 2015, resulting from declines in milk prices and cream prices, Dairy Crest has the opportunity to drive growth over the medium-to-longer-term through the management and and development of its flagship brands.

Hence, while volatility in that part of the business exposed to diary processing is expected to continue analysts at JP Morgan think the current multiples on which the shares are trading are “undemanding”.

That is particularly so in light of the 6% dividend yield, it adds.

As well, the benefit of recent farmgate price cuts will materialise in the second half and the comany did see steady growth at its four flagship brands.

For all of the above reasons the broker has kept its 'overweight' recommendation on the shares although it has lowered its price target to 480p from 530p beforehand.