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BAE - Trading remains in line

Equity research team | 6 October 2016 | A A A
BAE - Trading remains in line

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

BAE Systems plc Ordinary 2.5p

Sell: 555.80 | Buy: 556.20 | Change 0.00 (0.00%)
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Our view

The fallout from the UK's decision to leave the European Union has seen both bond yields and sterling decline sharply.

The weaker pound has added extra value to the group's significant overseas revenues, while lower bond yields could see the group's pension deficit, currently standing at £6.1bn, rise further. The pension shortfall is therefore likely to remain a major distraction, and a drain on cash for the group.

At the moment, there are areas of tension and conflict across the world, but any significant military action still appears some way off.

Defence markets have been tough for years, but may now see some improvement as austerity eases. The nature of modern warfare might have leapfrogged modern weaponry. A laser guided missile is little use against a cyber-threat. A battle tank is a tad blunt against an insurgency, whilst jet fighters are only really needed if your opponent has them too.

Defence companies will never be redundant, we fear, but we may be at an inflection point, where their traditional weapon platforms, tanks, jets, subs and missiles, are less important than data processing and surveillance capabilities. Cyber security, both national and commercial is an area BAE is keen to grow, but it is not yet big enough in the business to drive the overall group forward on its own.

BAE offers investors a prospective yield of 4%, with relatively modest growth over the next two years, supported by steadily increasing earnings.

6 October 2016 - Current trading

In a brief statement, BAE confirmed trading remains in line with company expectations, and that group underlying earnings per share are expected to be approximately 5% to 10% higher than last year's adjusted underlying earnings per share of 36.6p. The interim dividend of 8.6 pence per share will be paid on 30th November.

The group also confirmed that:

  • The group has made good progress working with its MoD customer and a Typhoon support partnership agreement was signed in July. This is expected to be worth £2.1bn over a ten year period.
  • The US the defence market outlook remains positive and the group's long term programmes are progressing to plan.
  • Discussions between BAE, the UK government and the Saudi Arabian government are progressing to define the scope and terms of the next five-year Saudi British Defence Co-operation Programme.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.