Barclays ups rating on BAE Systems
By Abigail Townsend
Date: Tuesday 28 Jan 2020
(Sharecast News) - Barclays has upped its rating on BAE Systems, following two core acquisitions struck earlier in January.
In a note published on Tuesday, analyst Charlotte Keyworth said the deals "suggest opportunism, favourable timing and, importantly, that the new management team are allocating capital to address the main drivers of the long-standing valuation discount to US primes".
BAE is acquiring Collins Aerospace's market-leading military GPS business for $1.93bn, its biggest acquisition for a decade. At the time, BAE said the deal should generate revenues of $359m in 2020, with potential for growth of 10% a year. It is also spending $275m buying the tactical radio unit from fellow defence contractor Raytheon.
As a result, Keyworth argued, BAE was "increasing US Department of Defense revenue exposure in attractive growth markets."
She continued: "We see this potentially warranting higher multiples on the $11.5bn revenue US portfolio, and it further bolsters our confidence in upside potential to our existing MSD year-on-year organic revenues growth forecasts."
It also meant that the engineer would be less prone to 'cash swings' linked to down payments on big export orders.
The UK election result and heightened geopolitical tensions were also highlighted as reasons to own the shares, together with greater confidence around the company's US land combat vehicle projects.
Barclays also pointed to the triennial review of BAE's £2.1bn pension deficit, which is due to start in April. It argued that while it did not expect any near-term changes in payments, "against a backdrop of improving cash generation and with payments set to reduce in full-year 2022 under current arrangements, achieving full funding in full-year 2026, we see heightened optionality for the group."
Keyworth concluded: "Earnings growth and cash generation remain central to price momentum for BAE. We trim our full-year 2020/21 EPS by 2% on foreign exchange and a higher UK pension servicing charge in the Air division, but upgrade to 'overweight' and raise our price target to 760p on strengthening macro tailwinds."
Barclays previously had an 'equal weight' rating on the stock and price target of 550.0p.
As at 13300 GMT, shares in BAE were down a little under 1% at 629.80p.
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