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BAE Systems - full-year guidance maintained

BAE's full-year guidance remains unchanged, with sales forecast to grow by 3-5% from £23.3bn.

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BAE's full-year guidance remains unchanged, with sales forecast to grow by 3-5% from £23.3bn. Underlying operating profit growth's expected to outpace this, moving 4-6% higher from £2.5bn.

Group CEO, Charles Woodburn, said that the group's "global presence and diverse portfolio of products and services provide a high visibility for top line growth, margin expansion and cash generation in the coming years".

UK, US and European defence budgets are all expected to increase over the coming years. Given the defence spending environment and order intake so far this year, BAE once again expects orders to exceed sales for the full year.

As previously announced, Sir Roger Carr will step down as Chairman at today's AGM, having served his full allowable term.

The three-year buyback programme for up to £1.5bn, which commenced in July 2022, is now over 60% complete.

The shares were broadly flat following the announcement.

View the latest BAE share price and how to deal

Our view

Given BAE is in the defence business - manufacturing heavy duty military equipment like fighter jets and aircraft carriers - recent global events have increased demand for BAE's products. Amid escalating global tensions, many governments are raising their defence budgets, and BAE continues to benefit by capturing this extra spending.

BAE has no control over the geopolitical landscape, so the exact results from recent developments are hard to predict. But that brings us to the group's formidable order book. Last we heard, it was sitting at a hefty £59bn. And with orders expected to exceed sales again this year, we anticipate this figure continuing to grow. Because these are typically long-cycle orders, with revenues spread over several years, it gives BAE multi-year revenue visibility.

But keep in mind that profitability hinges on an ability to estimate future costs. The long-term nature of many contracts means that the related risks and costs can change over time. Currently, its turbulent energy costs and potential supply chain issues that management have called out are the main trip hazards.

The group's using some of its financial firepower to accelerate research & development in a bid to improve its portfolio, which we view as a smart move. Companies that invest now are more likely to reap the benefits in the future, especially as defence spending worldwide has continued to trend upwards. But bear in mind that defence budgets go up and down, so the current raised budget levels are unlikely to continue indefinitely.

BAE's also been funnelling some of its cash into strategic acquisitions in key growth areas. Military training software firm Bohemia Interactive Simulations, acquired last year, is already driving growth within Cyber & Intelligence. This part of the business is responsible for just a fraction of BAE's total revenue right now, but could become a much more vital growth engine moving forward.

The balance sheet is looking in good shape. The net pension position remains in an accounting surplus after a prolonged period in an accounting deficit. This change is thanks to the group's funding commitments over the years and the current high interest rate environment.

Cash flow has historically been a thorn in BAE's side, but we were pleasantly surprised to see continued progress. The higher cash flows are helping to fund increased shareholder returns via dividends and share buybacks.

Reliable revenue streams are a very enviable asset and help underpin a prospective dividend yield of 2.9%. Please remember no dividend is ever guaranteed. Ultimately, we think BAE's in good shape to deliver on its long-term growth strategy and the market appears to agree with a valuation some way above the long-term average.

BAE key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 4th May 2023