Interactive Investor

ii view: BAE Systems in record-breaking mood

Offering exposure to a broad range of military equipment that now includes space. Buy, sell, or hold?

21st February 2024 15:49

Keith Bowman from interactive investor

Full-year results to 31 December

  • Sales up 9% to £25.3 billion
  • Adjusted profit (EBIT) up 9% to £2.68 billion
  • Final dividend of 18.5p per share
  • Total 2023 payment up 11% to 30p per share
  • Net debt (excluding lease liabilities) halved to £1 billion 

Chief executive Charles Woodburn said: 

“We've delivered a strong operational and financial performance in 2023 and I'm extremely proud of the way our people have delivered cutting-edge equipment and services to our customers, working together with partners across our supply chain.

“We'll keep driving the business forward, investing in new technologies, facilities and our people. This will help us deliver on our order backlog and help ensure our government customers stay ahead in an uncertain world, whilst delivering increased value to our shareholders and the communities where we operate."

ii round-up:

Defence company BAE Systems (LSE:BA.) today detailed a record order book as ongoing geopolitical tensions underwrote further expected demand for the year ahead. 

The maker of equipment from armoured vehicles to jet fighter components reported record annual order intake of £37.7 billion, pushing its order book to a record £69.8 billion and taking adjusted profit (EBIT) up 9% year-over-year to £2.68 billion. A final dividend of 18.5p makes a total 2023 payment of 30p per share, up 11% from 2022.

Shares in the FTSE 100 company fell 2% in UK trading having come into this news up by close to 40% over the last year. That’s similar to defence aerospace exposed Melrose Industries (LSE:MRO), although way behind a 200% gain for civil and military aircraft maker Rolls-Royce Holdings (LSE:RR.). The Footsie itself is down 4% over that time. 

BAE management continues to expect revenues for the 2024 year ahead to grow by up to 12% and push adjusted profits up between 11% and 13%. 

New orders during 2023 included those for multiple combat vehicles, new submarines, and artillery equipment for Sweden, along with deliveries such as ten Typhoon jets to the Qatar Emiri Air Force and a new five-year fighter jet support service agreement with Saudi Arabia.  

The Farnborough headquartered company also acquired Ball Aerospace for £4.4 billion, increasing its presence in the US and within the expected high-growth area of space. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging BAE as a ‘top pick’ and upping its fair value estimate by 50p to 1,450p.

Its AGM is scheduled for 9 May.  

ii view:

BAE Systems employs more than 90,000 people across 40 countries. Aircraft related sales generated its biggest slug of profit during this latest financial year at 34%, followed by electronic systems such as navigation equipment at 31%, maritime items 15%, platforms & services including vehicles and ammunition at 13% and cyber & Intelligence the balance of 7%. Geographically, the US accounted for 42% of 2023 sales, the UK 26%, with other big customers including Saudi Arabia at 11% and Australia 4%. 

For investors, ethical reasons might deter some investors from buying shares in a defence contractor. Changes of government can come with future budget implications, any acquisition and including its purchase of Ball Aerospace is not without risks, while an estimated price/earnings (PE) ratio above the three- and ten-year averages suggest the shares are not obviously cheap. 

On the upside, ongoing global conflicts are likely adding to defence demand, with tensions between the West and China not to be ignored. Diversity of both product and geographical region also exists. Its acquisition of Ball Aerospace pushes BAE into the space sector, while the dividend payment is progressive, rising for more than 15 years consecutively and leaving the shares offering a forecast yield of over 2.5% (not guaranteed). 

On balance, and despite continued risks, this major defence contractor looks to remain worthy of its place in many diversified investor portfolios.  

Positives: 

  • Diversity of products and geographical sales
  • Progressive dividend policy

Negatives:

  • Arms manufacturing may generate ethical concerns
  • Subject to government finances

The average rating of stock market analysts:

Buy

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