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BAE Systems - on track for full year

BAE Systems is on track to meet its full year targets, ignoring the effect of exchange rates.

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BAE Systems is on track to meet its full year targets, ignoring the effect of exchange rates. This includes 4-6% underlying operating profit growth and free cash flow of at least £1bn.

The group has secured £10bn in order intakes since the half year, taking the total so far to £28bn. BAE also highlighted that many of the countries it operates in are increasing their defence spending, which is expected to result in further long-term contracts for the group.

Recruitment constraints have started to ease and there has been no "material" impact from higher energy prices. The group highlighted it's continuing to experience supply chain issues, especially in areas that rely on microelectronics.

BAE said its balance sheet remains strong and there are no major debt maturities in the near-term. £484m of the £1.5bn share buyback programme has been completed.

BAE shares rose 3.0% following the announcement.

View the latest BAE share price and how to deal

The author holds shares in BAE Systems.

Our view

Given BAE is in the defence business, the current crisis is having a positive effect on BAE's growth, as it expects key customers to increase defence spending (more on that later). All-in-all, BAE is doing well.

The group's primarily in the business of manufacturing and delivering heavy duty military equipment - think fighter jets and aircraft carriers. A significant portion of existing defence contracts are deemed critical, and that gives BAE great visibility over its multi-billion-pound revenues. Now that the US and UK have confirmed their commitment to maintaining defence spend, that path is even clearer. Especially given the "increased threat" environment as BAE describes it.

The group's using some of its financial firepower to accelerate research & development spend. This is a good move in our view as defence spending across the world continues to balloon and the group looks to improve its portfolio.

BAE's also been funnelling some of its cash into strategic acquisitions in key growth areas. Military training software firm Bohemia Interactive Simulations, acquired in March, 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.

Cash flow has historically been a thorn in BAE's side, but we were pleasantly surprised to see continued progress. Working capital management coupled with strong profits means this is the second year running that cashflow is in the black.

Costs are facing pressure from supply chain disruption, but for now we're happy to give BAE the benefit of the doubt when it says it's offsetting the worst of the financial impact. BAE's position as a critical defence supplier should continue to hold it in good stead.

Reliable revenue streams are a very enviable asset in the current environment, and help underpin a prospective dividend yield of 3.9%. 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.

The author holds shares in BAE plc.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 15th November 2022