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UK Defence companies \"looking more interesting (with caveats)\', JP Morgan says

By Alexander Bueso

Date: Wednesday 17 Jul 2019

UK Defence companies \

(Sharecast News) - Analysts at JP Morgan reiterated their \"selectively positive\" stance on European Civil Aerospace, labelling Rolls Royce (Underweight; target price: 650.0p) as one of its two top ideas in the sector while keeping Ultra Electronics (Overweight; target price: 1,820.0p) as its top pick.
Albeit with caveats, UK defence companies were looking \"more interesting\" they said, pointing to higher investment outlays by the US Department of Defence over 2018 and thus far in 2019, telling clients that they were now \"seeing the money start to flow down to the UK defence companies\".

In a further boost for that group of companies, defensive earnings gained in allure given the backdrop of profit warnings among more cyclical names.

The stronger US dollar-sterling exchange rate could also ad a few percentage points to their earnings per share and lower interest rates meant some of their dividend yields were drawing attention, they said.

On the flip side, UK politics remained \"highly uncertain\" with a \"growing risk of a general election to solve the Brexit impasse\".

Indeed, \"a Corbyn-led Labour government could be very negative for some UK defence companies,\" they said.

There was also uncertainty around future arms sales to Saudi - posing a risk to BAE Systems (Neutral; target price: 530.0p) guidance on cash in 2019 and several companies needed to resolve \"execution issues\".

They also noted that Rolls was the most exposed name in ECA to emerging markets and the wide body market, although \"one positive for RR right now is the weakness of the £ vs. the $.\"

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