BAE Systems Is Well Positioned to Benefit From Rising Defense Budgets; Increase in FVE

Wide-moat BAE Systems is trading in line with expectations and reconfirmed full-year guidance despite supply chain and staffing challenges. The group believes it has the necessary levers at its disposal to offset short-term headwinds. Looking further out, the company seems confident that it will benefit from higher defense spending as a result of rising global threats spurred by the Ukraine war. As a result, we increase our fair value estimate by 17% to GBX 700 (ADR: USD 35) to account for higher top-line growth. We increase revenue growth in the later years of our forecasts, as lead times on contract tenders and production tend to be long, especially given BAE’s high share of long-cycle programs. The lower pension deficit due to excess contributions and rising rates also contributed to the increase in fair value.