BAE Systems plc (BA.) Ordinary 2.5p
HL comment (25 February 2021)
Full year sales, excluding the impact of exchange rate movements, rose 4% to £20.9bn. Underlying EBITA - which measures operating profit excluding interest, tax and amortisation payments, rose 1% £2.1bn.
For the new financial year, BAE expects sales growth of 5% - 7%, and underlying profits are expected to rise over 10%.
The group announced a final dividend of 14.2p per share, bringing the total for 2020 to 23.7p. The delayed dividend of 13.8p from 2019 was also paid in addition to this.
The shares rose 1% following the announcement.
Supply chain interruptions and weakness in commercial aviation dented demand in some parts of BAE's business--particularly within the Air and Platforms & Services segments. Sales for commercial avionics systems (flight controls for passenger aircraft) are weak.
But BAE managed to deliver a full-year uptick in sales and stable profits overall, as defence spending remained strong.
That's the beauty of a huge, diversified defence company like BAE. 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 overall, that gives BAE great visibility over its multi-billion pound order book and revenues.
Having reliable revenue streams means BAE was able to remain focused on two (expensive) strategic goals despite COVID. The first was closing two acquisitions within the Electronic Systems division and the other is paying down its pension deficit.
BAE snapped up the opportunity to buy US-based Military Global Positioning System and Airborne Tactical Radio businesses. The GPS business, which protects against navigational interference, cost $1.9bn while the communications purchase was worth $275m. The two compliment the group's existing navigation and communication offerings and improved sales latter-half of the year. Further cost-savings should be realised in 2021 as well. All of this makes the purchase a worthwhile endeavour in our view.
BAE's Cyber & Intelligence business made strides this year as well, after a reorganisation effort turned out a sharp increase in profits. This tech-heavy segment is responsible for just a fraction of BAE's total revenue, but as technology continues to play a larger role in warfare, we expect it become an increasingly important part of BAE.
The group is by no means untouchable, though.
Pain within BAE's commercial sales will probably persist well into 2021, or perhaps beyond if travel continues to suffer. And US defence spending could dip if the Biden presidency decides to cut the budget.
Cash flow has always been a thorn in BAE's side, and 2020 pension contributions squashed that figure even further. We're expecting to see things loosen up this year, but if they don't the dividend could come under pressure.
BAE's position as a critical defence supplier should continue to hold it in good stead. And reliable revenue streams are a very enviable asset in the current environment. We also note the valuation isn't too demanding. Investors should be prepared to take a long-term view and stomach some ups and downs, while commercial demand patterns and defence budgets smooth themselves out.
BAE key facts
- Price/Earnings ratio: 10.2
- 10 year average Price/Earnings ratio: 11.0
- Prospective dividend yield (next 12 months): 5.1%
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.
Full Year Results (all figures underlying unless otherwise stated)
Sales in the Air division (37.9% of group revenue) rose 6% to £7.9bn, driven by F-35, Typhoon activity and continued progress on the Qatar Typhoon and Hawk aircraft programme. A strong second half helped offset earlier Covid-related challenges. Flat profit margins (return on sales) of 11.9% meant EBITA rose at a similar rate to sales, rising 6.1% to £941m. The group is continuing to manage its supply chain to mitigate the impacts of Covid-19, including the downturn in the commercial aircraft market.
Electronic Systems sales rose 2.7% to £4.6bn, half of which was driven by acquisitions. Covid lowered demand for commercial products, and sales for these rose around 3%. Commercial revenues are more profitable, so the declines in this area meant overall EBITA fell slightly to £684m (2019:£687m), despite the overall increase in sales.
US Platforms & Services saw sales increase 5% to £3.5bn, reflecting continued momentum in US combat vehicles. The pandemic resulted in delivery delays on most vehicle programmes, and there were "significant interruptions" and delays to Ship Repair. This hurt efficiency and made each transaction more expensive, bringing the return on sales down to 5.6% from 8%. This fed into a 27% decline in EBITA to £195m.
Increased construction activity on Dreadnought Class submarines drove a 4.5% uptick in sales to £3.3bn in the Maritime division. Overall efficiency improved as the Dreadnought Class submarines programme continued to advance, leading to a 0.8bps increase in return on sales to 9.4%. This helped EBITA rise 14.2% to £306m.
Cyber intelligence sales rose 4.6% to £1.8bn, driven by Government Services and US & Intelligence Security business, which offset declines in Financial services. Restructuring at Applied Intelligence was behind a 49.5% increase in EBITA to £136m.
Free cash flow more than halved to £367m due to a £1bn pension contribution. Excluding the impact of that contribution, free cash flow rose to £1.4bn (2019:£850m).
A £1bn bond issuance to fund the pension scheme and Electronic Systems acquisitions increased the group's net debt position to £2.7bn, from £743m in 2019. The group payed £1.7bn into its pension scheme in 2020 (2019: £461m).
The group's order backlog stands at £45.2bn (2019: £45.4bn) Air orders account for around half of this. The backlog represents roughly 80% of next year's expected sales.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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