Berenberg sees upbeat aerospace outlook, but Iraq unrest may weigh

17th Jun 2014 14:13

Defence firms are cashing in on more US budget certainty and civil aerospace prospects remain good, but Iraq unrest could throw the cat among the pigeons, broker Berenberg says.Civil aerospace and defence stock valuations have converged in the last year as defence headwinds have moderated and profit momentum of civil aerospace manufacturers has faltered, the broker said as it launched coverage of nine of the sector's stocks.Most defence companies are cautious, but expect to return to organic growth next year as the US has finally pulled together an executable budget and top-line declines are moderating, it said.Civil aerospace stocks, which Berenberg said it preferred, should at least meet growth expectations as the industry continues to increase production and as aftermarket activity recovers.Berenberg Analyst Andrew Gollan said: "If they do, then current valuations look attractive."However, Gollan said in a note that the evolving geo-political situation in Iraq, where Sunni Islamist militants have clashed with Iraqi government forces across the country, were disproportionately affecting sentiment.He added that other economic developments such as Emirates' cancellation of its order for Airbus A350 aircraft were also causing waves."Clearly, sector valuations could be at risk if the macro situation deteriorates," he said.As well as the nine newly covered stocks, Berenberg also included Germany's Rheinmetall and MTU Aero Engine Holdings in its note.It is advising investors to buy France's Safran, Germany's Rheinmetall, pan-European manufacturer Airbus and the UK's Rolls-Royce, Meggitt and GKN.It has hold recommendations on Britain's BAE Systems, Cobham, Qinetiq, Ultra Electronics and Germany's MTU Aero Engines.PW