UBS upgrades BAE Sytems to 'buy'

3rd Jul 2015 08:28

UBS upgraded BAE Systems to 'buy' from 'neutral' but cut the price target to 510p from 540p.It said the recent weakness in the BAE share price was caused by uncertainty around the future of the Williamstown shipyard and the Eurofighter Typhoon programme, as well as the pending Strategic Defence and Security Review (SDSR).The bank said it is taking a precautionary view and cut estimates to account for the closure of the Williamstown shipyard and no new Eurofighter orders, which leads to the target price downgrade.However, it upgraded the stock, saying that even after de-risking its forecast, the valuation is attractive. Also, "in times of uncertainty we find BAE's independence from the economic cycle attractive."It said the SDSR could weigh on the share price in the near term, but that concerns are overdone as BAE should be fairly well protected. It pointed out that UK Ministry of Defence makes up only 20% of group sales/profits and said that most of their major programmes are either under contract and/or are international collaboration.In addition, "if UK defence is cut 10%-20% budget over 5 years and BAE is similarly impacted, it would mean a reduction of growth of around 0.5% to around 1% per annum, which implies a 10-20p reduction to our fair value."At 0844 BST, the company's shares were up 1.2% at 458.80p.