1H’21 recap: Interims highlighted momentum in orders (intake +13% YoY) and execution (margins +c160bps on adj. EBIT basis), with cash generation an ongoing highlight, at £461m (FCF, vs INVe £58m / cons. £71m outflow). Sales increased 2% (+6% at constant currency), to £10.04bn (in line with cons/INVe); Adj. EBIT £1,028m (+8% / +5% vs cons/INVe); Adj. (FD) EPS 21.9p (+10%/ +7% vs cons/INVe); Interim dividend increased 5% to 9.9p. A share buyback (SBB) was announced, of £500m, or c3% of the market cap. Outlook: Trading guidance is unchanged despite an FX headwind. US DoD modernisation outlays remain supportive of near-term trading, at +6% ttm in June. The medium-term outlook is also turning more positive, with Senate Democrats supporting the Administration’s FY22 budget request and proposing 2% YoY increases out to 2026. Some would also prefer more. Estimates: We leave trading assumptions unchanged, noting a 53% H2 bias (adj EBIT basis), in line with FY19A. FY21E FCF increases due to disposals in the first half. Our FY21/22E adjusted diluted EPS increase by 1%/3% respectively reflecting the estimated impact of the SBB. Our view: We increase our TP to 680p (prev:600p), driven by the lower net accounting deficit of £2.4bn (down 46% mainly on discount rate moves) which we reflect in our SoTP valuation (post-tax). At 33% of net assets, the net pension deficit (pre-tax) is at its lowest level since 2007, when BAE’s discount to a US peer group was between 0-10%, vs the current discount of c30%. In our view, further re-rating of the shares may be driven by discount convergence, de-leveraging or further buy-backs driven by strong cash generation and sentiment inflection on defence stocks generally. A FCF yield of 8% and DPS yield of 4.5% remain attractive; BUY, TP 680p (prev: 600p). Next Event: DSEI 14-17 September (Let us know if you would like to join us).