BAE Systems plc (BA.) Ordinary 2.5p
HL comment (5 May 2022)
BAE is on-track to meet full year expectations, including sales growth of 2-4% and underlying operating profit growth of 4-6%.
The group said it was facing supply chain, delivery time and staffing pressures, but it's still offsetting the worst of the financial impacts. That's largely thanks to the long-term nature of its contracts.
BAE also commented it may see increased growth as its key customers respond to the "heightened threat environment".
The shares fell 2.3% following the announcement.
Given BAE is in the defence business, the current crisis is having a positive effect on BAE's growth expectations, 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 bought 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 in the first half of the year. All of this makes the purchase a worthwhile endeavour in our view.
BAE's also in the process of beefing up its tech-heavy Cyber & Intelligence as technology continues to play a larger role in warfare. Cyber & Intelligence 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 3.5%. Please remember no dividend is ever guaranteed. Ultimately, we think BAE's in good shape to deliver on its long-term growth strategy.
BAE key facts
- Forward Price/Earnings ratio: 14.8
- 10 year average forward Price/Earnings ratio: 11.5
- Prospective dividend yield (next 12 months): 3.5%
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.
BAE said order flow to-date has been positive, especially for longer-term programmes. Contract wins have included electric drive systems for new zero-emission capable hybrid transit buses in Philadelphia, an 11-year contract for support to the UK's RAF Hawk fleet, and a US Navy field support Cyber and Intel programme.
The group said: "many of the countries in which we operate have announced or are making plans to increase spending to counter the elevated and evolving threat environment on multiple fronts." This includes the US, UK and Europe. The Australia business is set to grow significantly.
In March, BAE acquired Bohemia Interactive Simulations - a leading developer of advanced military simulation and training software.
The author holds shares in BAE plc.
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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