December 2021
BAE at a glance.
BAE Systems PLC is the
largest defence contractor in Europe and the
third largest
in the world (based on 2017 revenues). Its major operations are in the
United Kingdom and
United States where it supplies the US Department of Defence. Other major markets include Australia, India, and Saudi Arabia, which account for about
20% of BAE's overall sales.
BAE’s
portfolio includes combat aircraft, warships, tanks, armoured vehicles, artillery, missiles, small arms ammunition, cyber & intelligence, and nuclear missile submarines. The main arms of the business are summarised in an image from their most recent report:
Source: BAE Systems PLCThe aerospace and defence firm has proved to be a reliable performer during the pandemic. Its sales
(5%) and operating profit
(2%) both increased in 2020 while many of its rivals experienced a sudden and large-scale
decline in financial performance.
Encouragingly, 2021's
half-year results showed that BAE was making
further progress. Sales increased by
6% vs sales last year and earnings per share rose by
25%. As a result, the dividends have also seen a
5% rise, continuing
a 5-year trend of increasing dividends.
Despite its
solid performance and a
promising outlook
for 2022, the company’s share price has remained
flat over the last 12 months. Its overall financial position remains reasonably
sound, leaving BAE in a strong position to overcome short-term challenges posed by the pandemic. The only potential concern is the
debt to equity, which is marginally
higher than it was at the end of last year.
One of the crucial factors which will influence BA's share price in the next 12 months is
global defence spending. Thus far, defence spending has been largely
unaffected
by the pandemic, with governments sticking to military and security commitments. BAE systems appear
confident that the current US and UK regimes are set to
increase spending. Factors such as geopolitical risks in the Middle East, a strong global economic recovery and a commitment among Nato members to increase defence spending to
2% of economic output could prompt
buoyant demand for BAE’s products and services. In fact, in their half year results, they highlighted that many of the countries the group operates in have already published plans to
increase their defence spending as they come out of the pandemic, particularly in Australia.
"The recent AUKUS announcement is
strategically significant." BAE said in a recent statement, referring to a new defence pact signed between Australia, Britain and the United States in September. The deal will help Australia acquire U.S. nuclear-powered submarines, seen as a
boost for BAE, which already makes nuclear submarines for the UK.
"This is a clear example of how nations are looking to co-ordinate capabilities in multi-domain operations to address the threat environment." BAE said.
Another thing we liked about the most recent set of results is that the growth seems to be coming from
all arms of the business, rather than being driven by a single source.
From it's most recent set of financial reports, we get the impression the company will
hold firm
on its financial targets for the year, hailing “good operational performance” so far in 2021, with sales for the year on track to be between
3% and
5% higher than in 2020, with underlying earnings expected to rise by between
6% and
8%.
Charles Woodburn, chief executive of BAE Systems, said: “We’re evolving our business to be well positioned for
growth over the medium term alongside a focus on longer-term value drivers as we ramp up investment in advanced technologies and progress our sustainability agenda."
“Our continued
good operational performance underlines our confidence in the full year guidance for top line growth and margin expansion as well as our three-year cash flow target.
“Demand for our capabilities remains
high and we have a
strong pipeline of opportunities across our broad geographic portfolio that will enable our skilled, global workforce to deliver capabilities which will support our customers in responding to the evolving threat environment.”
Finally, the company added that it had to date completed £308 million ($415.4 million) of a £500 million share buyback programme announced earlier this year, which will add further
value
to shareholders.
Conclusion
The future outlook appears to be
positive for BAE systems, with end-of-year results looking strong and demand for their defence products set to
increase again next year. This adds extra
buying incentive to an already consistent, reliable company with a healthy and growing dividend.
We will be adding it to the CC
portfolio on Monday.
