ii view: business better than expected at BAE Systems

First-half results to 30 June

• Sales up 13% to £13.34billion
• Adjusted profit (EBIT) up 13% to £1.39 billion
• Interim dividend up 8% to 12.4p per share
• Order intake of £15.1 billion, down from £21.1 billion during H1 2023

Guidance:

• Now expects full-year sales growth of 12% to 14%, up from 10% to 12%
• Now expects full-year adjusted profit growth of 12% to 14%, up from 11% to 13% and $2.68 billion in 2023

Chief executive Charles Woodburn said: 

"Thanks to the outstanding efforts of our employees around the world, we delivered a strong operational and financial performance in the first half of the year, giving us confidence to increase our year-end guidance across all our key metrics. 

"Our order intake shows that demand for our products and services remains high and we are well positioned for sustained growth in the coming years. We will keep investing in new technologies, facilities and our people so that we can deliver on our record order backlog and help our government customers stay ahead in an uncertain world."

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ii round-up:

Defence equipment maker BAE Systems (LSE:BA.) today delivered sales and profit ahead of City forecasts, enabling the defence equipment maker to raise full-year forecasts. 

New navy vessel orders of £5.7 billion during the first half to late June pushed its backlog of orders to a record £74.1 billion, taking adjusted profit up 13% to £1.39 billion. Analysts had expected £1.36 billion. Total new orders received during the six-month period slowed to £15.1 billion from £21.1 billion during the first half of 2023. 

Shares in the FTSE 100 company rose 1% in UK trading having come into these latest results up around 15% year-to-date. That’s behind a one-third increase for FTSE 250 defence contractor Babcock International Group (LSE:BAB) but ahead of an 8% gain for the FTSE 100 index itself.  

BAE Systems makes an array of equipment from submarines to jet fighter components and armoured vehicles. 

It now expects annual sales to grow by 12-14%, up from its previous estimate of 10-12%. Adjusted profit is now estimated to grow by 12-14%, up from a previous 11-13% and 2023’s $2.68 billion outcome. 

Other orders received during the half-year included £3.2 billion for Electronic Systems and £2.8 billion for Platforms and Services encompassing armoured vehicles. Jet fighter related orders totalled £2.3 billion, with Cyber & Intelligence totalling £1.2 billion. 

An 8% increase in the interim dividend to 12.4p per share comes alongside a recently commenced £1.5 billion share buyback programme. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on BAE post the news, reiterating its estimate of fair value at 1,550p per share and highlighting the defence contractor as a ‘top pick.’

A third-quarter trading update is likely mid-November. 

ii view:

Competing against global rivals such as Lockheed Martin Corp (NYSE:LMT) and Northrop Grumman Corp (NYSE:NOC), BAE Systems employs approximately 100,000 people in around 40 countries. Aircraft related sales generated its biggest slug of profit in 2023 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 was its largest market in 2023, accounting for 46% of sales, with the UK at 26% and other big customers including Saudi Arabia at 11% and Australia 4%. 

For investors, ethical concerns given the nature of BAE's business may deter some investors from owning shares in the company. Changes of government can come with future budget implications, with both the UK under new leadership and a Presidential election in the US in November. Acquisitions, and including its relatively recent purchase of Ball Aerospace, are not without risk, while an forecast price/ earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap. 

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However, conflicts in Europe and the Middle East, and heightened tensions between the West and Russia and China have increased demand for military equipment, and BAE has  diverse range of products and geographical reach. The purchase of Ball Aerospace has widened its product portfolio into the space market, while the dividend payment is progressive, having risen for more than 15 years consecutively and leaving the shares on a modest dividend yield of around 2.5%. 

In all, and despite continued risks, this major defence contractor looks to remain worthy of its place in diversified portfolios of those comfortable investing in the defence sector.  

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