BAE Systems PLC (LSE:BA.) shares lagged the rest of the defence sector after a cautious note from Citi about the impact of Donald Trump's 'One Big Beautiful Bill Act'.
Defence and aerospace were again providing the thrust for the FTSE 350 on Wednesday morning, with Chemring Group (LSE:CHG), Babcock International PLC (LSE:BAB) and Melrose Industries PLC (LSE:MRO, OTC:MLSPF) topping the blue-chip leaderboard.
Shares in Babcock were up 4.2%, putting it at the top of the FTSE 100, followed by Melrose with a 2.6% gain, while BAE Systems PLC (LSE:BA.) was flat. On the FTSE 250, Chemring Group (LSE:CHG) shares were up 5.2% and QinetiQ Group PLC (LSE:QQ.) had risen 1.8%.
Citi analysts said that BAE, Melrose and QinetiQ "appear most at risk" from section 899 of Trump's OBBBA (all analysts love an acronym), following feedback from defence industry experts.
If enacted in its Congressional form, though it has yet to go to the Senate, section 899 may allow the US to increase federal taxes on foreign-domiciled companies whose home country is seen by the US Treasury to have a "discriminatory" tax regime, with a 5% increase in year one, rising progressively to 20% in the fourth year.
BAE Systems has around 45-50% sales in the US, Citi pointed out, with Melrose's share around 25-30% US net assets and QinetiQ about 20% of sales in the US.
If the bill passes in its current form and the UK is deemed to be "discriminatory", the analysts estimate BAE Systems could suffer 3% downside to earnings per share in the first year, rising to around 12% in year four, assuming no mitigation occurs.
"However, we also note that section 899 appears to disincentivise investment into the into the US, which would appear at odds to President Trump's general political thrust," the Citi team added.