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BAE - profits grow alongside record order intakes

BAE's full-year revenues grew 8.9% to £21.3bn, reflecting growth in all segments.

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BAE's full-year revenues grew 8.9% to £21.3bn, reflecting growth in all segments. This included double-digit growth from the Electronic Systems division, which develops precision guidance and military flight controls. Underlying operating profits rose from £2.2bn to £2.5bn, ahead of consensus.

There was a record order intake of £37.1bn last year as many countries increased their defence budgets. This brings the total order backlog up to £59bn.

Free cash flow rose marginally from £1.9bn to £2.0bn. The net debt position improved from £2.2bn to £2.0bn.

£793m worth of buybacks were made in 2022. A final dividend of 16.6p per share has been proposed, which if accepted would bring the full year total to 27.0p.

Looking to 2023, BAE expects underlying operating profits to grow in the 4% to 6% range.

The shares fell 1.2% 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 is so far benefitting by capturing this extra spending.

BAE has no control over the geopolitical landscape, so the exact results from recent developments is hard to predict. But that brings us to the group's formidable order book. Record order intakes in 2022 means that the order book's sitting at a hefty £59bn. As these are typically long-cycle orders, with revenues spread over several years, it gives BAE multi-year revenue visibility. An enviable asset to have in uncertain times.

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 which invest now are more likely to reap the benefits in the future, especially as defence spending across the world continues 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 has finally swung from a significant accounting deficit to an accounting surplus. 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 have meant that despite increased shareholder returns via dividends and share buybacks, the net debt position has improved too.

But ultimately, the group's profitability is based on its estimates of revenues and future costs. And the long-term nature of many contracts means that the related risks and costs can change over time too. Currently its turbulent energy costs and potential supply chain issues that management have called out as the main trip hazards.

Reliable revenue streams are a very enviable asset in the current environment, 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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Article history
Published: 23rd February 2023