BAE Systems’ full-year guidance remains unchanged, with sales forecast to grow by 10-12% from 2023’s base of £25.3bn. Underlying operating profit growth is expected to outpace this, moving 11-13% higher from £2.7bn.
Group CEO, Charles Woodburn, said that the group’s “global presence and diverse portfolio of products and services provide high visibility for top-line growth, margin expansion and cash generation in the coming years.”
The integration of recently acquired Ball Aerospace is underway, and has been renamed to Space & Mission Systems. The business has had a “good start to the year, securing a number of key contracts.”
The three-year share buyback programme for up to £1.5bn, which commenced in July 2022, is now over 90% complete.
The shares were broadly flat following the announcement.
Our view
BAE continues to move from strength to strength, with full-year sales and underlying operating profits set to grow at double-digit rates this year. The company manufactures heavy-duty military equipment like fighter jets, aircraft and submarines, and recent global events have increased demand for BAE's products.
Despite being a UK-based company, a whopping 42% of its sales came from the US in 2023, making it the largest single contributing region. On an absolute basis, US military spending trumps any other country in the world, so having large exposure to this market is proving very beneficial.
But BAE hasn’t stopped there. It sealed the deal on its £4.4bn acquisition of US-based Ball Aerospace in February, which should further increase its foothold on that side of the pond. Ball has unique in-space capabilities, which is seen as a major growth area in the defence industry. The integration of the new business looks to be going well and should help drive top-line and margin growth, although nothing is guaranteed.
The group booked £37.7bn worth of orders in 2023, taking the order backlog up to a record £69.8bn. 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 have moved in the right direction. The group's likely to use 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.
At year-end, the balance sheet was in good shape. The Ball Aerospace deal will push debt levels higher, but we don’t see this as a major issue given the group’s healthy cash flows and demand outlook. However, it does mean we could see the rate of share buybacks slow in the near to medium term.
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. Reliable revenue streams are a very enviable asset and help underpin a prospective dividend yield of 2.4%. Please remember no dividend is ever guaranteed.
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 Systems key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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