BAE Systems is on track to meet its full-year guidance. This includes sales and underlying operating profit growth of 5-7% and 6-8% respectively. Full-year free cash flow is also expected to be in excess of £1.8bn.
The group's secured around £10bn of order intakes since the half-year mark, taking the year-to-date total up to around £30bn. BAE pointed out that most major defence programmes are long cycle, meaning that contracts secured now will be executed over many years, which provides the group with long-term visibility over revenue growth.
The regulatory process surrounding BAE's $5.55bn acquisition of Ball Aerospace is "progressing well" and the group's targeting a completion date in the first half of 2024.
Through dividends and share buybacks, BAE expects to return around £1.4bn of cash to shareholders this year.
The shares were broadly flat following the announcement.
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Our view
A positive trading update showcases 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.
But first, we'd be remiss not to talk about BAE's mammoth $5.55bn acquisition of Ball Aerospace. It looks like a good fit to us and displays serious intent to build out its in-space capabilities and relationships within the US intelligence community. The deal's expected to be settled in the first half of 2024 and will be funded by new debt and cash on hand.
The traditional defence business looks set to dominate BAE's operations for the immediate future though. Here the company manufactures heavy-duty military equipment like fighter jets and aircraft carriers, and recent global events have increased demand for BAE's products.
There's been around £10bn of order intakes since the half-year mark, pushing the year-to-date total to a very healthy total of around £30bn. 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 has called out are the main trip hazards.
These risks are currently being navigated well and profits are heading in the right direction. The group's also using some of its financial firepower to acquire other businesses which can slot straight into its portfolio and begin contributing to revenue and profit growth right away. Although, given the size of the Ball Aerospace acquisition, it'll likely only be small bolt-on purchases that get added to the portfolio in the near future.
For now, the balance sheet's looking in good shape. But a large amount of cash is needed for the acquisition of Ball Aerospace, so BAE's going to need to take on a decent chunk of debt. That'll put pressure on cash resources moving forward, meaning we could see the rate of shareholder returns slow in the near to medium term.
Reliable revenue streams are a very enviable asset and help underpin a prospective dividend yield of 2.9%. 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.
The author holds shares in BAE Systems.
Environmental, social and governance (ESG) risk
The aerospace and defence sector is high-risk in terms of ESG. Product governance and business ethics are key risk drivers. Carbon emissions from products and services, data privacy and security and labour relations are also contributors to ESG risk.
According to Sustainalytics, BAE System's management of ESG risk is strong. It has a product safety policy and chain of accountability and assesses safety throughout product development. It has a board-level committee that oversees business ethics risks and has improved disclosure regarding human rights. However, disclosure regarding quality management standards and external certifications are lacking, and BAE should improve reporting on business ethics incident investigations. Employee development programmes are strong and the group has committed to net zero with interim targets in place.
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.
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