Analysts weighed in on the impact for BAE Systems PLC (LSE:BA.) and Rolls-Royce Holdings PLC (LSE:RR.), though it seemed more questions were asked than answered as details still remain vague.
Deutsche provided some ad hoc analysis in the wake of the meeting of premiers Biden, Sunak and Albanese in California on Monday to confirm the creation of a £5bn fleet of nuclear submarines for Australia under the Aukus pact.
Details of the next-generation submarine programme were disclosed on 13 March, confirming that the UK design will be the platform of choice for Australia by the early 2040s.
Australia will purchase three to five of the nuclear-powered submarines, which will be manufactured initially in the UK by BAE, with Rolls-Royce engines, with delivery in the late 2030s, before manufacturing is transferred to Australia for later boats for delivery in the 2040s, explained UBS.
“This is a long-term positive for both BAE Systems and Rolls-Royce, but narrowing down the financial impact will need more time, pending details over delivery volumes and timeframe,” said Deutsche.
Deutsche repeated its ‘buy’ advice and 1,050p price target. The shares rose 1% to 917.8p.
UBS said that as BAE will manage the construction of the class for the UK, "we believe it will likely have a significant role to play in both countries, though details are light at this stage".
"It is possible, though we believe unlikely, that Australia could downgrade its requirements after purchasing the Virginia-class submarines from the US."
Thanks to AUKUS, BAE submarine revenue growth is likely to improve from 2024/25, two years earlier than UBS expected, but with the boats based on the next generation class, analysts said, "we believe a step change in revenues before 2030 is unlikely, which may disappoint some".
Of the 17 banks and brokerages covering BAE, 12 are positive on the stock in the defence contractor. The consensus price target is 1,011p.