EFTA01385521.pdf

> Energy, Materials & Industrials Deutsche Bank BAE Systems — Jaime Rowbotham, BUY, close 574p, 730p tgt, 27% upside ■ We see scope for 63% TSR to 2020. With FCF forecast at £1.35bn in 2020, £1.35bn FCF by 2020, driven by EBIT growth and better cash conversion if the stock were to trade on a 5% yield then those buying now would make 18% TSR per year. Thus now is an attractive entry point into a multi-year 1600 1350 110 93 (25) i4ci defence spending up-cycle. 1400 90 1200 282 Mil ■ Flat earnings are masking a compelling growth story. We forecast EBIT 840 1000 127 growth at 5% at the company level. 800 115 598 ■ US strength (9% EBIT CAGR to 2020) should come from growth in 600 IIII1 Combat Vehicles & Ship Repair and Electronic Systems, and a profit 400 200 recovery at Applied Intelligence in Cyber. • It should be possible to offset declining Typhoon profit contribution in *0* de Ac% cc, 60 ce se 4k .60 ..tr e e Air. The key drivers of this are Missiles (MBDA, in which BAE has a 37.5% p 9,<• get \ to rfi 4% cp stake, is growing at a 12% pa EBIT CAGR), Aftermarket and the stake in the F-35. There is upside potential to this from potential new Typhoon Source: Deutsche Bank eslinales orders, such as from Saudi Arabia. • Maritime profitability is well-underpinned under this UK government, BAE trades on a c30% discount relative to its US peers though there is risk from a change in government. 60% • Cash conversion is set to improve from here on lower outflows on 40% working capital, provisions (as most are now non-operational) and pensions 20% (post the triennial review). 0% 20% • BAE trades on a discount to EU and US peers at c13.5x 19E PIE and -40% c9x 19E EV/EBIT, versus 14.5x and 10.5x for EU peers, and 19x and 14x -60% for US peers. -80% • Catalysts: conversion of contract opportunities 51;%, cp pis cfr 6‘ p0 efs c.^2 te % tfr ifb (<4' S.' NC) eiti l 2P St Se Se Set Se Se lc Se- Sr Se- Se. lac Se' Se. Related DB Research: ••••••••••PER premium/discount vs US defence —EV/EBIT premium/discount vs US def BAE: Cashing in: >60% 3-year TSR potential (Rowbotham) Global Aerospace and Defence: Civil selective; Defence more effective (Kerner) Source: Deutsche Bank estimates Otnische Bank Research' European Equity Focus -.Bongo 2010 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086807 CONFIDENTIAL SDNY_GM_00232991 EFTA01385521