Deutsche Bank stays at 'buy' BAE Systems, sees earnings recovering in 2021

Deutsche Bank stuck to its 'buy' recommendation on shares of BAE Systems's, telling clients that while profits would drop sharply in 2020, a recovery would follow in 2021 and the engineer would make good on its dividend payments - or mostly.

"While Defence companies surely have a greater chance than most of a quick recovery to precrisis levels of activity, a lot will depend on the state of governmental budgets and any reprioritisation that might be required, in our view," the broker said.

The Covid-19 pandemic is expected to hamper its workers and disrupt supply chains throughout most of 2020, although those headwinds are expected to ease from the third quarter onwards.

At some of its business units, sales were seen crashing by as much as two thirds in the second quarter and by up to a third in the third quarter, before "some material 'catching up' from 4Q onwards".

As a result, the firm's earnings per share were seen falling by 14.1% against 2019 to reach 39.4p, but expected to recover by 21% to 47.5p in 2021.

The approximately £300m hit to profits is expected to flow through to BAE's cash-flow which is now pegged to be at £750m in 2020, although there are some upside risks.

To take note of, Deutsche incorporated the company's new deficit recovery plan into its estimates, which it said would add £1.45bn to free cash flow in 2022.

Regarding the company's dividend policy, the analysts assumed that the final payout for 2019 would be paid, albeit not until the backhalf of 2020, and that no interim dividend would be paid for 2020, although a full final dividend for the year would be forthcoming.