Ball Aerospace buy puts BAE in solid position, says Shore Capital

BAE Systems was trading with heavy losses on Thursday after the news that it has acquired Ball Aerospace – a move which broker Shore Capital viewed as a vote of confidence for the wider defence industry.

BAE announced it was spending $5.55bn on Ball Corporation's aerospace business, which makes spacecraft, mission payloads, optical systems, and antenna systems, serving the intelligence community, US Department of Defense, and civilian space agencies.

Shore Capital analyst Jamie Murray pointed out that the acquired business is expected to generate EBITDA of $310m at an EBITDA margin of 14% – “broadly in line with BAE’s current margins”. BAE expects it to generate EBIT margins of 12% after fully incorporated, which is higher than Shore Capital’s own medium-term expectations for the group.

“​​The acquisition appears to have a significant number of synergies with BAE’s current US business and positions it in fast growing segments of the defence market,” Murray said.

"We have highlighted previously that capital allocation including acquisitions play an important role for BAE and so we are not surprised that an acquisition like this is happening. It is a theme that we expect to continue, not just with BAE Systems, but across the defence industry as players look to scale up their operations so that they can capitalise on the long-term uptick for defence products."

Even before the acquisition, the broker had given the stock a fair value rating of 1,205p, suggesting 17% upside potential to Wednesday’s closing price of 1,002.5p.

The shares, however, were down 4.5% at 957.8p on Thursday morning.