BAE Systems’ first-half underlying sales rose 13% to £13.4bn, which was ahead of market expectations. All business units grew in the period, with the biggest uplift coming from Electronic Systems as a result of the Ball Aerospace acquisition (now renamed Space & Mission Systems within the business).
Underlying operating profit was also up 13% to £1.4bn, reflecting the increased sales.
Free cash flow fell from £1.1bn to £0.2bn. Net debt, excluding lease liabilities, rose from £1.0bn to £6.1bn, largely as a result of raising debt to fund the Ball Aerospace acquisition.
Full-year guidance has been upgraded. Sales and underlying operating profits are now expected to increase by 12-14%, up from 10-12% and 11-13% respectively.
An interim dividend of 12.4p per share has been announced, up 8%.
The shares were broadly flat following the announcement.
Our view
BAE continues to move from strength to strength, as first-half results came in ahead of market expectations. Performance is being buoyed by the integration of Ball Aerospace, it’s given management the confidence to slightly upgrade full-year guidance across all key metrics.
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 45% of its sales came from the US in the first half, 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 is progressing well and should help drive top-line and margin growth, although nothing is guaranteed.
The group booked £15.1bn worth of orders in the first half, taking the order backlog up to a record £74.1bn. 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.
Despite the rise in debt to help fund the Ball acquisition, we’re happy with the balance sheet. BAE has a strong demand outlook and plenty of free cash flow pumping around the business to manage these debt payments. 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 2.6%. 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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