Broker tips: BAE Systems, UK life assurers, Big Yellow

11th Jan 2016 13:19

(ShareCast News) - JP Morgan Cazenove believes 2016 will be a big year for defence stocks and has upgraded BAE Systems from 'neutral' to 'overweight'.The investment bank on Monday cited a major escalation in geo-political tensions as a reason why it will be a good year for the sector, as well as it being a "safe haven" as concerns grow about the global economy.It said there were four key positives for the sector, including the rise in US and European defence spending due to the Middle East, the related refugee crisis and Russia's foreign policy when it comes to Ukraine and Syria.JP Morgan Cazenove also said the stronger US dollar is a positive to UK defence companies, while US defence stocks perform better in an election year.However it wasn't as upbeat in the civil aerospace sector, with structural headwinds and a weak high-end jet market.That's compounded by the fact that a number of companies in the sector are exposed to oil and gas prices.With that in mind, JP Morgan Cazenove upgraded BAE Systems and also increased its target price from 465p to 605p."In recent periods (eg. 2002 and 2006), when the US defence spending was set to increase and/or there was extreme tension in the M.East, BAE traded at a 12-month forward P/E of 16-17x."We believe the conditions are in place for such multiple expansion to happen again."BAE was also added to JP Morgan Cazenove's European Analyst Focus List.Cobham, which is rated at 'overweight', also had its price target rasied from 300p to 335p, as well as Ultra Electronics, also rated at 'overweight', saw its price target rise from 2,000p to 2,210p. Deutsche Bank adjusted its ratings on London-listed life assurers as it took a look at the UK sector, saying the outlook was uncertain on a number of fronts.The bank said most UK life assurers continue to offer the potential for structural long-term growth with attractive dividend yields, but their share prices are currently wading through a morass of uncertainty.Arguably the biggest question mark is the outlook for world markets, which have historically been one of the key drivers of the segment, DB said.Other issues include Solvency II, which it thinks will prove less negative than is perhaps perceived, UK pension reform and 'Bexit' concerns.Near-term, Deutsche expects these issues to remain a drag on performance - at least relative to European peers - with the potential for some volatility as sentiment swings back and forth.It downgraded Prudential to 'hold' from 'buy', saying it faced the greatest amount of uncertainty, especially where slowing Asian growth and exposure to US credit markets was concerned."These have dominated the share price so far in 2016, but a deeper, more structural issue is that the US (40% of earnings) is also losing momentum - with net inflows set to slow to 3% by 2018."The bank sees both St James's Place and Standard Life as strongly positioned and said they are likely to show the best underlying growth of the companies it analyses.However, DB noted that their performances have diverged greatly, with St James's Place outperforming Standard Life by nearly 30% over the last year."UK pension reform and nervous equity markets are potential risks for both, but we think the risk is higher on both fronts at SJP - with a greater proportion of higher earners amongst its customers and estimated gearing of 1.2x to equity markets (vs Standard Life at 0.3x-0.4x on our estimates)," it said.It added that with SJP trading on 22x estimated 2017 earnings versus Standard Life at 12x, the latter offers the better risk-reward.It upgraded Standard Life to 'buy' from 'hold' and downgraded SJP to 'hold' from 'buy'.The bank kept its 'buy' rating on both Aviva and Legal & General. Big Yellow Group's target to double its earnings by 2022 doesn't look overly ambitious given its "outstanding" track record of growth, according to Investec on Monday.Investec issued an 'add' rating and target price of 834p to the self-storage company's stock ahead of its third quarter results on Tuesday."We forecast a three-year earnings per share and dividend per share compound annual growth rate of 12.2% driven by further occupancy and rental growth," said Investec analyst Alison Watson."Meanwhile the business model's non-reliance on the capital cycle (i.e. yield compression) is particularly attractive at this point in the property cycle."Investec predicts earnings per share of 30.9p in the full-year 2016, rising to 34.7p in 2016 and 38.4p in 2018, implying 42% growth over three years.