UK defence budget uncertainty raises concerns for BAE Systems, says Investec

9th Feb 2015 11:19

Investec has maintained a 'sell' recommendation for defence, security and aerospace group BAE Systems, highlighting the uncertainty surrounding future defence spending in the UK.Budgets will be cut following the general election in May regardless of which party comes out on top, predicted analyst Rami Myerson."Whilst our base assumption is that the impact of the cuts will be relatively small, we are concerned that, as the largest supplier to the UK Ministry of Defence, BAE's revenues and profits could be impacted disproportionately," he said.Myerson also said there could be potential delays to export orders, particularly from Saudi Arabia and Bahrain due to the recent collapse in oil prices.Meanwhile, BAE's growing net debt and pension liabilities could limit shareholder returns."A stabilising US defence budget and weaker Sterling are helpful, but likely insufficient to mitigate the headwinds," Myerson said.The stock is "no longer cheap on a price-to-earnings basis" and now trades in line with its UK defence peers."A premium valuation, relative to historic levels and peers, leaves the shares vulnerable in our view," Myerson said, adding that BAE's dividend yield of around 3.9% "does not adequately compensate for downside earnings risk".Investec kept a 440p target price for BAE, which was trading down 0.6% at 514.25p by 11:12.