Broker snap: UBS upgrades BAE to buy

10th Aug 2011 12:09

UBS has upgraded defence firm BAE Systems from neutral to buy following the group's interim results on 28 July."Upgrading to a buy [...] as we believe downside risk is minimised by reaching trough profit valuations, the high dividend yield, share buy-back and [price-to-earnings ratio] yield," said analysts Charles Armitage and Rami Myerson.The target price, however, is scaled back from 330p to 300p due to the increase in estimated pension underfunding since the first half.Nevertheless, the broker believes that BAE can produce £1-1.2bn of free cash flow generation on an ongoing basis."With an estimated dividend of 18.7p, this a) gives plenty of headroom to pay the dividend and b) offers the potential of annual share repurchases of similar levels to the £500m currently underway, without gearing up, giving circa 5.2% further accretion, and an effective yield of circa 12.5%."Shares edged 0.39% higher to 257.2p at 11.59am.BC