BAE scheme deficit could spook investors - RBS

British defence firm BAE Systems’ pension scheme deficit is creating “negative sentiment” among investors, lowering the target price for stock in the firm, banking analysts say.

The scheme's £3.2bn deficit is having a drag effect on the corporation's balance sheet, making it look less competitive next to its rivals, according to Royal Bank of Scotland analysts.

RBS has reduced its target price from 425p to 350p to factor in the deficit in light of the £17.6bn scheme's impact on the firm's valuation.

In a research note, RBS analyst Sandy Morris said: "More recently, pension liabilities have weighed upon sentiment, in our view. All in all, these factors have generally made it very difficult to argue that, say, BAE is 10% cheap relative to its peers.

"We have chosen to focus on the definition of enterprise value (EV) that includes pension liabilities as we believe the topic of pension deficits currently has a significant bearing upon sentiment toward those companies that do have such deficits. In the medium term, and assuming a more positive backdrop for global equity markets, that negative sentiment should diminish, in our view."

BAE is set to make a contribution of £160m to its pension scheme on the back of a £500m share buyback in July, but the pension funding deficit on BAE's main scheme and its 200 Plan is still likely to be about £3bn, according to half year results for 2011, up from a £2bn estimate made in 2007/08.

However, BAE Systems noted in its 2010 annual report a 0.5% change in net discount rates used to value liabilities would increase or decrease the deficit by £1.7bn.

In August, fears over BT's pension scheme deficit sent investors scurrying away from the stock. (PP Online, 10 Aug)