Broker snap: Unfashionable BAE a buy, says Nomura

27th Oct 2009 13:10

Market sentiment has turned decisively against defence stock BAE Systems but Nomura Securities remains a supporter of the stock.The Japanese broker has identified three main differentiators for BAE against other defence companies: the Saudi Arabia business, the F-35 Typhoon combat aircraft programmes and its enduring support services revenue.Nomura expects BAE's Saudi Arabia business to more than double its annual revenues by 2011 to £3.5bn. The group's partnership role on the two largest combat aircraft programmes of the next generation - the F-35 Joint Strike Fighter and the Eurofighter Typhoon - should also benefit the company while the 'through-life support services that represent some 38% of group sales' are not going to go away any time soon.'In terms of valuation, we estimate BAE is trading on 5.5x 2010 EV/EBIT [enterprise value/earnings before interest and tax] versus the European Capital Goods sector on 11.3x. Also, BAE has now de-rated to a 12-month forward P/E [price/earnings] of just 8.3x - a 37% discount to the wider European market,' the broker notes, adding that 'BAE also offers a 5% dividend yield.'Nomura has a price target of 450p for the stock.