BAE Systems PLC (LON:BA.) shares rose on Tuesday as analysts adjusted their sights higher for the defence giant’s shares to reflect the heightened geopolitical uncertainty and lower UK political risks.
JPMorgan Cazenove upgraded its rating to ‘overweight’ from its previous ‘neutral’ with a new share price target of 700p replacing its prior 600p.
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A “major overhang” on UK defence companies over the past two years has been the risk of a Labour government led by declared pacifist Jeremy Corbyn, the Cazenove analysts said in a note to clients on Tuesday.
The Tory Party’s election victory means the company should be not be at risk for the next several years as, even though an incoming defence review is likely to mean that some programmes might be cut or scaled back from the current “unaffordable” long-term procurement plans, as 90% of BAE’s UK business is on long-term programmes.
Taking account of more recent news, the analysts said the tensions in the Middle East do not yet imply higher defence spending by the US and other countries.
“But in uncertain times defence stocks are a safe haven and, at the very least, recent events should mean current defence spending plans are well supported.”
The upgraded was also made to reflect BAE’s a “solid growth outlook” for the next two years, improving execution after a few years of small contract problems and a 4% dividend yield that is the highest in the sector.
Elsewhere, Citigroup also upped its target price by 60p to 670p following the UK election result, which has so far failed to move the dial on the shares.
“We see two reasons behind this: 1) cash conversion is currently poor, but we see this improving and 2) Thales sales warning - while BAE Systems and Thales have similar upsides, the end market are very different - BAE Systems is much more US centric.”
BAE shares were up 1% to 595p by mid-morning on Tuesday.