Defence contractor BAE Systems PLC (LSE:BA.) is looking increasingly attractive as countries refocus on military prowess, according to Berenberg.
The broker upgraded its outlook for BAE Systems, arguing increased defence spending was expected as countries look for safety, with investors likely to follow to avoid the turmoil of traditionally strong equities.
Berenberg expects the US defence market, BAE’s biggest, to rise 8% in financial year 2023, with Germany’s recent commitment to defence spending above 2% of GDP seen as the catalyst to wholesale increases in countries’ capabilities amid fresh Russian hostility.
“The outlook for defence budgets globally has improved materially following Russia’s invasion of Ukraine, and this has helped drive a dramatic shift in sentiment back in favour of the sector,” Berenberg said.
“This marks a sea-change versus prior widespread fears over flat or declining budgets and it bodes well for BAE both in terms of driving future earnings growth and a higher rating.”
Beyond good macro sentiment falling in BAE’s favour, the broker pointed out the growth of the group’s multi-franchise programmes, spreading its reach across geographies and industries and indicating average annual revenue growth of 3% between 2021 and 2025.
The broker also believes a share buyback could be on the cards in the first half of 2022 as improving margins and programme execution were transitioning BAE into an “increasingly cash generative business”.
Berenberg upgraded its price target for BAE to 850p, marking 22% upside.
BAE’s share price was up 7.4% today to 742.8p by 14:15 GMT.