New Top Pick in EU Defence: BAE Systems PLC | Europe

Research evidence excerpt

New Top Pick in EU Defence: BAE Systems PLC | Europe

Underweight

800 MS Rating

Source: Refinitiv, Morgan Stanley Research

JUN '25 DEC '25 JUN '26 JUN '27 Risk Reward Themes

Key: Historical Stock Performance Current Stock Price Price Target Secular Growth: Positive

Source: Refinitiv, Morgan Stanley Research, Morgan Stanley Institutional Equities Division. The probabilities of our Bull, View descriptions of Risk Rewards Themes here

Base, and Bear case scenarios playing out were estimated with implied volatility data from the options market as of 23

Jun 2026. All figures are approximate risk-neutral probabilities of the stock reaching beyond the scenario price in either

three-months’ or one-years’ time. View explanation of Options Probabilities methodology here

BULL CASE 3,122p BASE CASE 2,420p BEAR CASE 1,600p

Accelerated growth, superior execution Continued operational and financial Defence spending outlook curtailed

execution

- Group revenue CAGR (3-year 2025-28) of - Group revenue CAGR (3-year 2025-28) of

9% driven by higher growth in the key US - Group revenue CAGR (3-year 2025-28) of 5% driven by a slower rise in defence

and European markets, where defence 7% driven by consistent operational budgets due to fiscal pressures and an

spending plans meet or exceed execution and underpinned by heightened easing of global tensions.

commitments. geopolitical tensions.

- Group EBIT margin contracts 150bp to

- Group EBIT margin expansion of 160bp to - Group EBIT margin expansion of 60bp to 9.3% in 2028, driven by poor execution and

12.4% in 2028 from strong execution and 11.4% in 2028, driving a 2025-28 EPS CAGR inability to pass through inflation.

pricing power. of 10%.

- Multiples based approach applies 12x to

- Buybacks continue at accelerated pace.