Summary of estimate upgrades: We increase FY22E/23E/24E sales by 4%/5%/5% (FX adjustment plus outer year optimism) that, combined with share buybacks, drives our adj. (FD) EPS estimates up by 12%/7%/12%. We upgrade FCF by 15%/8%/12% with the cash drag from the pension eliminated. Re-rating deserved: Appropriate steps have been taken to justify a re-rating closer to US peers; (1) operational improvements are expanding margins and cash generation, (2) pension requirements are no longer an issue, and (3) preferential geographic exposure to rising defence budgets. Supportive backdrop: NATO membership and European budget commitments are expanding. Poland recently announced intent to increase spend from 2% to 4% of GDP in 2023. The €1.2bn acquisition of munitions business Expal Systems by Rheinmetall at c.3x sales signals bullish European intent. Moreover, we see upside potential in Australia, where BAE is among the largest defence contractors; the AUKUS security alliance encompasses submarines, cyber enhancements, AI, hypersonic technology and EW. On this, we expect announcements soon. Tensions with China have risen with surveillance balloons recently shot down and US warnings about aiding Russia. The partnership in Japan also positions BAE to benefit from spend doubling as a % of GDP within 5 years in maritime and air system upgrades. Sensible capital commandment: The second tranche of the share buyback commenced in November, taking advantage of the discount. Estimated dividends and remaining share buybacks over 3 years totals 12% of current market cap. The dividend is well covered by earnings and FCF. The balance sheet remains deployable for bolt-on acquisitions. Valuation discount: On a CY23E P/E basis, the shares trade on a 15% discount relative to US Defence Primes and a 25% discount on an EV/EBITDA multiple (see page 2). We update our TP to 1015p from 680p. BUY.