ii view: BAE Systems numbers get warm reception

Defence manufacturer BAE Systems delivers improved profits on operational improvements.

Half-year results 

• Revenue up 4% to £9.4 billion
• Order intake down 13.2% to £8.42 Billion
• Adjusted profit up 9% to £999 million
• Net debt up 110% to £1.9 billion
• Interim dividend up 4.4% to 9.4p per share

Chief executive Charles Woodburn said:

"The first half performance underpins our guidance for the full year with improvements being made on a number of operational fronts. Our priority is to deliver consistent and strong operational performance for our customers and shareholders to enable us to meet our growth expectations over the medium term."

ii round-up:

BAE Systems (LSE:BA.) is UK's largest defence contractor, employing over 80,000 staff. Its Air division, making fighters such as the US F-35, was the biggest division by sales in 2018, accounting for around a third of revenue. 

Electronic Systems, building laser‑guided rockets, and Maritime, responsible for the Astute Class submarine, follow. Platforms & Services, making Amphibious Combat Vehicles and Cyber & Intelligence complete the picture. 

On a regional basis, the US is currently king, accounting for 45.9% of 2018 revenues, followed by the UK at 21.5% and Saudi Arabia at 14.7%. 

The death of Saudi journalist Jamal Khashoggi, allegedly by the Saudi government, has brought the company's deal to supply further military jets to the Saudis under a cloud of uncertainty. A Labour government in the UK could also put question marks over its nuclear submarine business. 

That said, tensions between the West and Russia still firmly underpin US defence spending, while government-orchestrated cyber attacks should benefit BAE's Cyber & Intelligence division. 

The company reported numbers at the upper end of analyst expectations in these half-year results. Adjusted profit (EBITA) rose by 9%, with each of its divisions, except for Cyber & Intelligence, enjoying positive momentum. 

The share price rose by over 2% in UK stock market morning trading. 

ii view:

Defence is driven by politics and government appetite for spending. As such, it is somewhat volatile in nature with order flow difficult to predict. The West's close relationship with Saudi Arabia and a potential change to a Labour government in the UK are of concern. For now, a sizeable order book at BAE provides investors with near-term comfort. The shares do not look expensive either, and a dividend, covered nearly twice by earnings and generating a prospective yield of well over 4%, helps compensate for some of the uncertainty. 

Positives: 

• Broad divisional progress reported
• Order backlog of £47.4 billion, up from £39.7 billion a year ago
• Progressive dividend policy

Negatives:

• United Technologies (NYSE:UTX) merging with Raytheon (NYSE:RTN) creates $120 billion all-US rival
• Political risk of possible Labour government 
• Major customer, Saudi Arabia, under international scrutiny 

The average rating of stock market analysts:

Buy