Defence company higher after positive note from JP Morgan

BAE boosted by rise in defence spending.
BAE boosted by rise in defence spending. Photograph: Bloomberg/Bloomberg via Getty Images

Despite a 5% fall in the Chinese stock market on continuing concerns about the world’s second largest economy, European shares are attempting to edge higher.

The FTSE 100 is currently up 12.06 points at 5924.30, while Germany’s Dax is 79 points better and France’s Cac has climbed 35 points. Chris Beauchamp, senior market analyst at IG, said:

It was a shaky start for European investors this morning, as cautious buying took the place of last week’s rampant selling. Weekend data from China was not particularly encouraging, while gyrations in the Chinese foreign exchange market continues, but as with any story eventually the power to shock wears off. We are seeing this with China this morning, and while there will still be plenty of concerns, the impending arrival of US earnings season provides a new story to focus on. For the FTSE, the market continues to find support around the lows seen in August, September and December of last year, and so while this holds buyers will remain optimistic the downward move of early January has run its course.

Among the leading risers in the UK market is BAE Systems, 9p better at 528.5p after a positive note on defence companies from JP Morgan. Given the uncertainty in the Middle East and elsewhere, the bank forecasts rising defence budgets in the US and Europe. As a result it has moved its recommendation on BAE from neutral to overweight and lifted its target price from 465p to 605p. The bank said:

In recent periods (eg. 2002 and 2006) when US defence spending was set to increase and/or there was extreme tension in the Middle East, BAE traded at a 12-month forward PE of 16-17 times. We believe the conditions are in place for such multiple expansion to happen again.

In the UK, the government is now more supportive of defence than it was in its first administration, when austerity was the focus.

Potential for export sales in the Middle East given the current level of military operations in the region.

The stronger dollar versus pound provides a useful translation boost to earnings.

Applying a PE of 16 times to our 2017 estimated earnings per share would drive a valuation of around 700p.

But Qinetiq has fallen 7p to 253.7p as JP Morgan cut its rating from overweight to neutral. On the positive side, Qinetiq has strong free cashflow and an attractive dividend yield, as well as a strong balance sheet which means it can make acquisitions or return cash to shareholders. There is also the prospect of a takeover bid or break-up. But, said the bank:

Little exposure to the US defence upturn makes Qinetiq relatively less attractive versus peers like Cobham/Ultra/BAE. Qinetiq assumes that new government regulations (regarding the pricing on sole source contractions) in the UK will result in lower EBITA margins.

Standard Life is up 4.4p at 367.4p after Deutsche Bank moved from hold to buy, albeit cutting its target price from 315p to 305p. Jefferies has also issued a buy note on the insurance business. Deutsche said:

The recent share price slide has taken Standard Life into better value territory once again, having appeared relatively fully priced mid-year. Overall, we forecast earnings per share growth of 9% per annum over the next three years – the highest (sustainable) growth rate in the sector bar St James’s Place. Unlike many of its peers, the group also has balance sheet flexibility in the form of relatively low debt levels, which is both a defensive attribute as well as offering potential for value accretion. Despite this, the shares now yield [an estimated] 5.1% in 2015 – more than the wider, pan-European sector and more even than Aviva (in both 2015 and 2016). Thus, with the shares looking good value again, we upgrade to buy.

Elsewhere mining shares have stabilised after recent falls on the concerns about the Chinese economy. Anglo American is now up 4.2p at 233.4p, while Rio Tinto is up 2p at 1741p.

BG is down 4p at 936p after Standard Life said it would vote against the takeover bid from Royal Dutch Shell, where it is a major investor.

But Laird is up 21.4p at 350.4p on a report of a possible offer from US rivals for the electronic components company, while Argos-owner Home Retail – the subject of an approach from Sainsbury – is 7.5p higher at 145.4p.


[Source:- the gurdian]

By Adam