BAE Systems shares rise after Investec upgrades to buy

Shares in BAE Systems are up after Investec upgraded the stock from 'sell' to 'buy' on Friday, as well as upgrading the target price from 410p to 530p.

It comes a day after the FTSE 100 company announced it won an extension to its nuclear submarine deal from the UK Ministry of Defence, taking the value of the work on the Astute-class vessel to £1.3bn.

Investec said that BAE stands to benefit from the UK’s Strategic Defence and Security Review (SDSR) out next week, which will clear up the country’s defence and security priorities.

“The UK Government’s “prosperity agenda” suggests the SDSR rhetoric may be more favourable to UK suppliers than previous reviews.

“A decision, as part of the SDSR, to extend the lives of the RAF’s Tornado and Eurofighter Tranche 1 aircraft could also be positive.”

Investec also noted that the approval of a two-year US defence budget should help reduce uncertainty across the Atlantic for the company.

In addition, it said that there had been some bad news for the company recently, but the impact was smaller than expected and is now out of the way.

“BAE does not expect a follow-on order for Eurofighters from Saudi Arabia in 2015 and has decided to slow down production from 2016.

“The cut in production rates is in line with our forecasts, but encouragingly the financial impact will be smaller than we expected.”

Morgan Stanley sees opportunities

"We think the SDSR needn't pose any risks to BAE,and may in fact present some new opportunities," analysts at Morgan Stanley chipped in.

Among those opportunities, the broker pointed out the possibility of work in upgrading the RAF's Tranche-1 Typhoon jets, in the absence of which IHS Jane's in July said the UK's combat fleet levels could to historical lows.

Greater clarity on the final order size for the next generation F-35 air superiority figher would "be supportive for the long-term outlook" of BAE. Nonethless, a final decision was not expected until 2017.

Yet the biggest prize in the pipeline, with the Main Gate decision scheduled for 2016, was the Successor nuclear programme for the production of focur nuclear-powered submarines. That would be worth around £15bn in sales for BAE, analysts Jaime B Rowbotham and Joseph Ayoola said.

The company’s share price was up 5.6p (1.16%) to 489.7p at 1126 GMT on the back of the broker’s note.