BAE Systems PLC | Europe DIP in Focus

Research evidence excerpt

BAE Systems PLC | Europe DIP in Focus

Idea

* = GAAP or approximated based on GAAP

** = Based on consensus methodologyMHe has argued (here) that the security environment has changed fundamentally

e = Morgan Stanley Research estimates

because of Russia, broader geopolitical tensions and the need to rebuild military

capability.

What Does This Imply For UK Defence Names? For defence equities, the principal

risk is therefore one of timing rather than direction, in our view. We would expect

investors to focus on whether the NATO summit deadline is maintained, the extent

of any potential revisions to the funding envelope (i.e. the £13.5bn level currently

being debated or closer to the £18-28bn sought by defence leaders), and the degree

to which a new government might seek to strengthen or re-prioritise the UK's

defence modernisation plans. While we think increased execution and scheduling

risk in the near term cannot be ruled out, a published DIP and continued upward

trajectory for UK defence spending still seems a credible scenario.

Our View - Buy The DIP? While UK political and fiscal uncertainties appear likely to

linger, publication of the DIP should remove an important overhang on UK defence-

exposed stocks by providing greater visibility on programme priorities, procurement

timelines and the allocation of incremental defence spending. Even if the overall

funding envelope remains unchanged, the provision of a clearer roadmap should

reduce policy uncertainty and support a re-rating of companies most exposed to UK

defence modernisation. For BAE Systems (OW) in particular, we would expect the

DIP to demonstrate the group's insulated portfolio by providing strong support for

key programmes underpinning medium to longer term growth in the UK, including

GCAP and AUKUS.