Citi, JP Morgan upgrade BAE Systems
JP Morgan and Citi have upgraded BAE Systems, after the political landscape turned in the defence specialist’s favour.
Aerospace and Defence
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16:59 26/04/24
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16:40 26/04/24
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17:09 26/04/24
FTSE 350
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16:59 26/04/24
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Investors had been concerned about the prospect of a Labour government cutting the UK’s defence budget. But after the Conservative’s landslide victory last month, JP Morgan has upgraded BAE to ‘overweight’ and increased the price target to 700.0p, while Citi increased its price target to 670.0p.
David Perry, analyst at JP Morgan, said the upgrade reflected “a solid growth outlook for the next two years at least, a major de-risking of the UK political landscape, heightened geo-political tensions [and] improving execution”. Perry also pointed to BAE’s 4% dividend yield, “the highest in the aerospace & defence sector.”
He continued: “We expect multiple expansion, so now set our December 2020 price target by applying a PE of x15 (previously x13) and EV/EBITDA of x12 (previously x11) to our 2021 estimates. Our new price target of 700p implies 19% upside.”
Citi analysts Charles Armitage and Pavan Daswani also pointed to the improved political outlook: “Following the Conservatives winning the UK election, we are eliminating the 60p ‘Corbyn risk’ from our valuation.”
However, they also conceded: “Despite the Conservative win, BAE Systems has not closed the valuation gap. We see two reasons behind this: cash conversion is currently poor, but we see improving, and Thales sales warning. While BAE Systems and Thales have similar upsides, the end markets are very different; BAE Systems is much more US centric.”
Citi has a ‘buy’ recommendation on BAE.
As at 1430 GMT, shares in BAE were largely flat at 587p, after being the FTSE 100’s top performer on Monday. Ahead of the UK general election at the start of December, the shares were trading around 548p.