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BAE Systems - profits move higher, full-year guidance upgraded

BAE's first-half sales rose to £12.0bn, up 11% on ignoring exchange rate impacts, with all segments delivering growth.

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BAE's first-half sales rose to £12.0bn, up 11% on ignoring exchange rate impacts, with all segments delivering growth.

Underlying operating profit moved 10% higher to £1.3bn, helped by higher sales as well as margin expansion in the group's key Air and Platforms & Services segments.

Free cash flow increased by £1bn to £1.1bn. Net debt, excluding lease liabilities, fell from £3.1bn to £1.8bn.

Full-year sales and underlying operating profit growth expectations have both been increased by 2%, moving up to a range of 5-7% and 6-8% respectively. Free cash flow guidance has also been raised from more than £1.2bn to more than £1.8bn.

The interim dividend was raised by 11% to 11.5p per share, and a new £1.5bn buyback programme has been announced.

The shares rose 5.1% following the announcement.

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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.

A strong set of first-half results have shown that BAE occupies a key space in the defence market. And with some of its biggest buyers, the UK, US and Europe, all expected to continue raising defence budgets over the coming years, the sky's looking bright for this jet-maker.

In the first half, orders were almost double the group's sales, helping to push the group's order book up to an incredible £66.2bn. And 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.

For now, these risks are being navigated well and profits are heading in the right direction. 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.

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 flows are much healthier now too, helping to fund increased shareholder returns via dividends and a new £1.5bn share buyback programme. The impressive performance across the first half has given management the confidence to bump up its full-year guidance for all its key metrics - and we wouldn't bet against them delivering.

Reliable revenue streams are a very enviable asset and help underpin a prospective dividend yield of 3.2%. 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: 2nd August 2023