BAE Systems will continue flying high
Jun 16 2008 by Andrew Miller, The Journal
BAE Systems – We are retaining our buy recommendation and increase to 525p our fair value estimate for BAE Systems (BAE). After a better-than-expected 2007 performance and factoring in acquisitions, plus contract wins, consensus estimates have moved up. So our fair value estimate can increase and remains based on 2008 forecasts and a 15% European sector premium.
In uncertain markets, we are attracted by BAE’s lower risk growth outlook, backed by a good defence order book, while good cash flows provide additional acquisition-backed growth possibilities.
Carphone Warehouse – We are retaining our outperform recommendation on Carphone Warehouse. The announcement of a joint venture with Best Buy, enabling the US retailer’s move into the European electricals sector, was met with scepticism from the market.
Such scepticism could be largely attributed to the fact that the deal is earnings dilutive in year one, alongside fears as to how Carphone would use the £1.1bn in cash. We believe that the market is underestimating the potential of both the joint venture and Carphone’s fixed line business. For a start, the deal resolves balance sheet concerns, raised at the Q4 results.
It also crystallises some of the value within the retail division at a healthy 6.6x EBITDA, which equates to a slight premium to Best Buy’s current multiple. Three quarters of the revenues will now be coming from the fixed line division, where the increasingly visible, strong growth warrants a much higher multiple in our view.
We have revised our fair value lower to reflect a higher WACC (due to a higher equity component) and a more conservative forecast on broadband margins. Our 360p DCF derived fair value would put the shares on just over 14x calendarised 2009 estimates for close to 30% earnings growth.
Land Securities – We retain our outperform recommendation on Land Securities and believe the company has the best quality portfolio to weather the present bear market for real estate assets. We now expect Land Securities’ net asset value (NAV) to fall by 15% in the current year and by a further 3% in the following year. Accordingly, we have lowered our NAV forecasts to 1660p and 1610p respectively. In turn, our fair value estimate falls to 1410p, which represents a 15% discount to our NAV forecast for March 2009.
The deteriorating economic background has led to a rise in 10-year gilt yields and is putting increased pressure on property yields to rise further. Also, expectations of negative rental income trends pose an additional risk to asset values over the next year. What evidence there is supports the view that asset values will fall due to rising property yields.
However, at just below 5%, we believe that Land Securities’ dividend yield may provide some support for the share price in the near future. We reiterate our view that the outperform recommendation on Land Securities is based on the belief that the group offers the best defensive prospects amongst its peers.
It is not an active buy recommendation. For existing shareholders, we would retain present holdings, but we expect sentiment to the real estate sector will remain negative over the coming months.
Andrew Miller, Regional centre head – Barclays Wealth
