BAE Systems has released half year results that show underlying earnings per share rising 10.6% to 21.9p.
Guidance for 2019 earnings per share to increase by a mid-single digit percentage remains unchanged, and BAE still expects to deliver more than £3bn of cumulative free cash flow over the three years to 2021. However, 2019 net debt is now expected to remain steady rather than increase slightly.
The interim dividend rose 4.4% to 9.4p per share.
The shares were little moved on the news.
BAE makes military equipment. The MoD is a big client, but it also has long-standing relationships with the US and Saudi Arabian governments.
After some tough years in global defence markets, BAE has finally seen several large orders come through. Qatar, Canada, and Australia have called on BAE to boost their air forces and navies, and President Trump has ramped up US defence spending.
That's not to say it'll be plain sailing from here.
Labour has, for better or for worse, made it clear defence wouldn't be a priority if it were to enter government, while a disorderly Brexit could divert money away from the defence budget. The current US administration hasn't always been the most consistent on policy, while international condemnation of the Saudi Arabian government over the death of journalist Jamal Khashoggi led to speculation that BAE's multi-billion dollar deal with its air force could be under threat. We'll be keeping an eye on the planned deal to sell The Kingdom a further 48 Eurofighter Typhoon jets for around £10bn.
While the US President may still be fond of hulking great war machines, the nature of modern warfare has changed the landscape. A laser guided missile is little use against a cyber-threat, and cutting edge jet fighters are only really necessary if your opponent has them too.
That explains the emergence of the Cyber & Intelligence business, which encompasses both national and commercial cyber security. It's not yet making a substantial contribution to group profit, and has been forced into some restructuring. But if all goes to plan it'll be a growth driver in the future.
Cash flow from the core business has proven rather lumpy of late, so BAE will need this to improve if it's to hit its target of £3bn+ in free cash by 2021.
However, we still think BAE offers good income-paying potential. The multi-billion pound order book provides excellent revenue visibility, while the balance sheet looks robust, despite the sizeable pension deficit adding an unwanted burden.
The shares offer investors a prospective yield of 4.4%, and analysts expect the dividend and earnings to increase in the coming years, although of course there are no guarantees.
Half year results
Underlying sales rose 4% to £9.4bn, but the order backlog of £47.4bn was £1bn lower than six months previously as the group worked through long-term contracts.
Across the group, underlying EBITA (earnings before interest, tax and amortisation) rose 9% to £999m. Growth came across all divisions other than Cyber & Intelligence, where a £25m restructuring charge pushed underlying EBITA down from £48m to £25m, and Air, where margins declined as a result of the new Qatar deal pushing EBITA down 4.6% to £438m.
US Platforms & Services continues to make progress addressing its operational challenges, particularly in combat vehicles, and underlying EBITA more than doubled to £135m.
Within Electronic Systems, sales were boosted by the F-35 and APKWS programmes and classified activity. With margins nudging up to 14.8% underlying EBITA rose 21.5% to £316m.
Weaker order intake in Maritime meant the order backlog dipped, but profits rose from £93m to £133m as margins improved back to within target range. Like Electronic Systems, the division has a bias towards the first half.
As is often the case, BAE saw operating cash outflows in the first half. However, the outflow of £309m, compares favourably to the -£436m last year. Net debt fell slightly year-on-year to £1.9bn. BAE's share of the pre-tax accounting net pension deficit increased from £3.9bn to £4.3bn over the half.
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