UBS has cut its rating for BAE Systems PLC (LON:BA.) to reflect a more “tempered outlook “ on the UK defence budget, as well as on Saudi Arabia sales despite a recent positive ruling from the UK High Court.
In a note to clients, the Swiss bank’s analysts said they have downgraded their stance for the FTSE 100-listed stock to ‘neutral’ from ‘buy’ and reduced their target price by around 10% to 665p from 730p after chopping back estimates.
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They added that their underlying earnings (EBIT) forecasts have been lowered by 1% for 2017 and 8% per annum over 2018-21.
The analysts pointed out that BAE has around 26% exposure to the UK defence budget which has, in their view, downside risks in a post -Brexit economic slowdown.
They also noted that the UK firm has around 35% of sales exposed to the US defence budget which the analysts still consider the fastest growing large defence budget at circa 4%-5% per annum over 2017-19.
However, they added, the 'Trump effect' in defence may not be as strong as initially anticipated with the US President’s 2018 draft requesting a US$603bn base budget less than the late June request asking for a US$621.5bn base.
The analysts think that BAE’s interim results - due on August 2 – are likely to be underwhelming, with the full-year group outlook expected to be reiterated despite a weak first-half, especially in Cyber activities.
But they said BAE could benefit from further sterling weakness and higher bond yields which could reduce the group’s pension underfunding to around £6.4bn in the first-half.
In late morning trading, BAE shares were 0.5%, or 3p lower at 623.5p.