Rolls-Royce boosted as JPMorgan says it's biggest FX winner in sector

The bank said it was updating its earnings per share estimates, mostly for the recent strengthening of the dollar versus the pound from $1.30/£1 to $1.25/£1.

It said BAE Systems and Ultra Electronics remain its top picks in defence, while Rolls-Royce is the big FX winner.

“In terms of FX transaction, every 1 US cent move versus sterling impacts RR’s civil aerospace earnings before interest, tax and amortisation by around £20m today, although the impact increases over time as RR's civil aerospace business grows,” JPM said.

The bank also lifted its price targets on BAE Systems and Ultra Electronics, to 655p from 625p and to 2,130p from 1,850p, respectively.

It reckons BAE can achieve average organic growth of around 3% a year from 2017-19. “If the $/£ stays at $1.25 this could add another 3-4% to group sales growth in 2017E,” it said.

It said that while investors are mostly worried about the increase in the pension deficit seen in the first half due to the collapse of UK bond yields, the next actuarial review will not be finalised until around November 2017 and it is impossible for investors to know what bond yields will be at that time.

As far as Ultra is concerned, it expects the company to achieve around 3% organic growth on average from 2017 to 2019, with FX adding about 3-4% more growth next year.

JPM rates BAE and Ultra at ‘overweight’ and RR at ‘neutral’.

At 0942 BST Rolls shares were up 1.8% to 789.50p, Ultra shares were up 1.5% to 1,872.92p and BAE was up 0.6% to 543.50p.