BAE Systems plc (BA.) Ordinary 2.5p
HL comment (29 July 2021)
Underlying sales of £10bn were up 6% at constant exchange rates (CER). That reflected growth across all segments. Underlying operating profits were up 27% at CER to £1bn, with underlying earnings-per-share (EPS) of 21.9p.
Taking the impact of currency headwinds into account, the group expects full year sales growth between 3% and 5% and profit growth of 6% to 8%. EPS are seen increasing between 3% and 5%, and the group plans to deliver over £1bn in operating free cash flow.
The interim dividend rose 5.3% to 9.9p. The board also approved a £500m buyback programme, set to begin immediately.
The shares were up 2.1% following the announcement
It seems the Covid clouds are clearing for BAE, putting it firmly on track to meet its growth goals for the year. That's despite muted air travel - which makes it harder to sell BAE's commercial flight control products.
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 revenues. Now that the US and UK have confirmed their commitment to maintaining defence spend, that path is even clearer.
The reliable revenue streams that carried BAE through the pandemic meant the firm could focus on future growth rather than survival. The group used 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 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. The group brought two new businesses under its umbrella in March, a nod to management's commitment to meeting changing customer needs. 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.
A £1bn pension contribution in 2020 helped chip away at the group's deficits, but pushed cashflow well into the red last year. Cash flow has always been a thorn in BAE's side, but we were pleasantly surprised by the group's marked improvement so far this year. Working capital management and the absence of another massive contribution meant the group was finally free-cash positive.
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. While the commercial side of BAE's business is still facing some uncertainty, the group's in good shape to deliver on its long-term growth strategy.
BAE key facts
- Price/Earnings ratio: 11.4
- 10 year average Price/Earnings ratio: 11.1
- Prospective dividend yield (next 12 months): 4.5%
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.
First Half Trading Update (all figures underlying and at CER)
BAE's order backlog declined from £46.1bn to £44.6bn with £42.4 worth of projects already paid for.
Air sales rose 6% to £3.8bn, driven by F-35, Typhoon support and upgrades as well as strong growth in Australia. Return on sales improved from 9.4% to 10.6% as the segment recovered from the pandemic. Good working capital management helped cash flow rise to £165m from £17m.
Sales for Electronic Systems rose 6% to £2.1bn as the integration of its communications acquisition was somewhat offset by the impact of Covid on the Controls & Avionics division. Return on sales edged up from 13% to 15.6% and strong demand for precision strike and C4ISR systems helped the order backlog grow modestly from the start of the year to £6.6bn.
Revenue for Platforms & Services grew 'modestly' to £1.6bn as combat vehicle volumes more than doubled, but was offset by Covid-related headwinds which dented growth in US ship repair and M777 sales to India. Operational challenges in the Ship Repair business meant profits fell 7.6%to £109m. The segment had a cash outflow of £9m compared to an inflow of £143m last year, reflecting more normal operations after Covid boosted results in 2020.
Maritime saw sales rise 10% to £1.7bn as activity picked up amid easing pandemic restrictions. Profits climbed to £149m from £109m.
Sales for Cyber & Intelligence were 'stable' at £861m, as 10% growth in its Government business was offset by commercial business disposals. Return on sales increased by more than 3 percentage points to 9.8%, helped by cost base improvements and high usage in its Government business.
Helped by the sale of the Filton and Broughton sites and the absence of lump sum pension contributions, free cash flow rose to £461m, compared to an outflow of £1.1bn at the same point last year. Net debt rose by £27m from the start of the year to £2.7bn.
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.
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.
Previous BAE Systems plc updates
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