BAE's attractions undervalued, JP Morgan says

BAE Systems offers potential upside of 50% that the market is undervaluing, JP Morgan analysts said as they reiterated their 'overweight' rating on the aerospace company.

JP Morgan trimmed earnings estimates for BAE by 10% for 2020, 6% in 2021 and 4% in 2022 to reflect Covid-19's impact on its civilian aerospace division and some disruption to the defence business. The bank also reduced its price target for BAE shares to 765p from 775p.

Organic revenue will contract by 2% in 2020 but then resume growth at 8% in 2021 and 5% the year after, JP Morgan said, adding that BAE was its "top idea" in European aerospace and defence stocks.

"Crucially, we expect no demand destruction for BAE’s defence products in the next few years," David Perry and fellow JP Morgan analysts wrote in a note to clients.

BAE is likely to keep its pledge to pay its deferred final dividend of 13.8p a share in the second half of 2020, the analysts said. That puts the shares on a dividend yield of about 5% for 2020.

The company is also close to ending almost two decades of pension deficit reduction payments with a final payment of £250m due in 2021. This puts the company's deficit in "the best shape ever" freeing cash flow.

"BAE offers growth, visibility and much lower risk than most stocks," Perry and colleagues wrote. "We believe the market is undervaluing these attractions."