BAE Systems has slipped back ahead of next week's Dubai air show, when it hopes to hear news on a proposed £6bn Eurofighter deal with the United Arab Emirates.
The UAE, which is hosting the show, is deciding whether to buy the Eurofighter and Dassault Systems Rafale aircraft. The Rafale deal was said to be the most likely last year, but visits to the Gulf state by UK prime minister David Cameron and concerns about the terms put things back up in the air.
BAE shares are currently 5.2p lower at 449p, and JP Morgan Cazenove has repeated its underweight recommendation. The bank said:
In July this year BAE told investors that at the Dubai air show it hopes to be able to announce progress in securing a contract from the UAE for 60 Eurofighters and also unmanned aerial vehicles. We [have] argued that a UAE contract for Eurofighters and associated equipment would be worth around 45p per share for BAE, and that this was already discounted in the current price.
The bank laid out five possibilities for next week:
Scenario 1 (worst case) – contract awarded to a rival: Some French defence industry executives believe they still have a chance to secure the UAE fighter jet contract. We believe BAE is still the front runner but we cannot rule out the French or US being successful, though probably not at Dubai next week.
Scenario 2 – no announcements at all from the UAE regarding the procurement of fighter jets.
Scenario 3 – holding pattern: In November 2012 the UAE and UK governments released a statement saying they will "establish a defence industrial partnership that involves close collaboration around Typhoon." This was rightly seen as a positive development for the Eurofighter consortium, although there is no guarantee of a contract being secured. If the only outcome from Dubai next week is another statement along these lines, it would not be negative but probably a little disappointing.
Scenario 4 – a formal government to government deal between the UK and the UAE: This would a good outcome for BAE, we believe, as it would be a definite stepping stone to a final contract. In December 2005 the UK finalised such a deal with Saudi Arabia. BAE issued an RNS which said that "the Governments of Saudi Arabia and the UK have signed an Understanding Document, which is intended to establish a greater partnership in modernising the Saudi Arabian Armed Forces and developing close service-to-service contacts especially through joint training and exercises." We see a similar UAE-UK announcement as quite possible at Dubai.
Scenario 5 (best case) – an actual contract for 60 Eurofighters: This is less likely than scenario 4, in our view, but not impossible. We would not expect the deliveries to be before 2018 but BAE could benefit from a near- term prepayment on the contract.
