Berenberg upgrades BAE Systems to 'buy'

The bank said the upgrade reflects "signs of a pivot in capital allocation towards strategic M&A, in addition to maintaining appropriate returns to shareholders, and our expectation that BAE will deliver a 10% EPS CAGR over 2023-27".

Berenberg said it was pleased to see signs of a pivot to pursuing strategic acquisitions. Over 2019-24, it forecasts that BAE will distribute 88% of its cumulative free cash flow to shareholders through dividends and share buybacks, the highest share among European peers.

"While we forecast that this share will remain at the upper end of the peer average (51%), the proposed $5.6bn acquisition of Ball Aerospace has signalled a greater willingness to pursue M&A, to open up new growth markets (in particular space).

"We think the medium-term financial outlook provided for Ball Aerospace is conservative, and also think further earnings accretive bolt-on acquisitions are likely, given the backdrop of steadily growing free cash flow over our forecast horizon."

In addition, the bank said that strong order intake is also increasing outer-year visibility and gives it confidence that we are entering a step-change in organic growth over the next five years.

"Against this backdrop, the shares offer good value, in our view, trading on 15.7x 2023 price-to-earnings for a 10% EPS CAGR over 2023-27."