Broker snap: UBS ups defence targets after US budget deal

13th Jan 2014 09:58

UBS has lifted its target prices for European aerospace and defence stocks, saying that the budget deal in the States reduces the uncertainty hanging over the sector.After being passed by Congress in mid-December, President Barack Obama signed a two-year budget deal at the start of the year that eased automatic spending cuts and reduced the risk of a government shutdown.UBS Analyst Charles Armitage said that deal lowers but does not entirely eliminate uncertainty in the sector. The deal "reduces near-term uncertainty and should allow companies with US defence exposure to manage their business better, rather than not knowing when and how deep potential cuts might be. "This is not to say that the risks have disappeared entirely as priorities are still unclear and we could face the uncertainty all over again as we approach the 2016 budget year (starting in October 2015)."Nevertheless, Armitage has raised target prices for UK-listed defence groups after reducing the "uncertainty discount" that UBS applies to companies with 35-50% exposure to the US. This discount has been cut from 10% to 5%.The target price for 'buy'-rated BAE Systems has been lifted from 475p to 510p. BAE is UBS' top pick among UK defence names "as it is now the cheapest stock in the sector on pretty much every metric", Armitage said.Meanwhile, Chemring's ('neutral') target price has been lifted from 215p to 230p and Ultra Electronics's ('neutral') target has been raised from 1,820p to 1,940p.However, Cobham (target unchanged at 290p) and QinetiQ (target raised from 215p to 235p), have both been downgraded from 'buy' to 'neutral'.BC