Broker tips: BAE Systems, Bytes Technology, Ashtead Group

Analysts at J.P. Morgan upgraded their recommendation for shares of BAE Systems on expectations for a stronger US dollar and a reduction in the UK corporate tax rate.

That was on top of potential positives including an improvement in market conditions in Saudi Arabia and higher defence spending in the UK.

"In the current fragile economic environment, we think the shares are very appealing," they said in a research report sent to clients.

To back up their view, they also pointed to the company's defensive growth profile, "solid" balance sheet, and an estimated dividend yield for 2022 of approximately 5.0%.

They also noted that over the next two months they had two corporate access events with BAE forthcoming, as well as a Capital Markets Day.

On the back of all of the above, they reiterated their 'overweight' stance on the shares and bumped up their target price by 4% to 1,000.0p.

Citi initiated coverage of Bytes Technology on Friday with a ‘neutral’ rating and 425p price target.

It noted that the IT value added reseller has a history of strong returns from the exceptional UK demand over recent years.

"In its short life as a UK-listed company, investors have been attracted to its strong sales-led culture, straightforward business model, and dividend policy, resulting in a consistent premium valuation relative to most peers," Citi said.

"Although a continuation of this premium may be sustainable, macro considerations are overpowering the sector’s strong trading fundamentals, making it difficult to see potential for significant share price appreciation in the medium term."

Liberum upgraded equipment rental firm Ashtead on Friday to ‘buy’ from ‘hold’ and hiked the price target to 4,900p from 3,800p, "as government programmes kick in".

The broker said that given the rapidly moving macroeconomic backdrop, it has chosen a pair trade for its "best idea": long Ashtead, short Ferguson.

"The two are both fantastic companies with strong balance sheets, high returns and leading market positions. They are both gaining market share year after year, organically, boosted by bolt-ons.

"We prefer Ashtead as it is overweight in commercial and infrastructure building in the US, where any cyclical weakness will be offset by help from mega-projects and US government largesse.

"Ferguson is overweight residential construction (54% sales) which is weakening rapidly," it said adding that valuations are low for both.

Liberum noted that Ashtead’s shares have de-rated from 28x forward earnings to 13x as the market’s appetite for growth and cyclicals has weakened.