Join our community of smart investors

BAE raises growth targets

The defence contractor beat its profit target as rising geopolitical tensions triggered higher demand for its products
February 18, 2016

Government pledges to tackle growing global warfare and geopolitical tensions sparked better than expected sales growth of 8 per cent at BAE Systems (BA.) in 2015. The delivery of Eurofighter Typhoon fighters to Saudi Arabia and a strong US dollar played a key role in this rise as the world's third-largest defence contractor began working through its healthy backlog of orders.

IC TIP: Buy at 509p

This reassuring sign, together with an increase in expected 2016 adjusted EPS of 5 per cent to 10 per cent, lifted the group's share price aby 2 per cent following the publication of results. After a period in which difficult markets forced the group to slow production of Typhoon fighter jets and cut capacity as its Australian shipyard, an uptick in spending from major customers has refuelled confidence.

In North America, business wins during the period included a deal with Boeing to build the next generation digital electronic warfare system and an order from the army to enhance night vision goggles. In the UK, the government's pledge to spend £178bn on equipment over the next decade yielded some even bigger wins. Highlights included an £859m contract to develop the new Type 26 global combat ship and £1.3bn for the latest class of nuclear-powered fleet submarines. As budget hikes steadily kick in, management is confident this order momentum will continue. It also expects to sign more Typhoon contracts following constructive talks with prospective customers in Saudi Arabia.

Another hot topic was cyber security. A series of high-profile attacks boosted the Applied Intelligence unit's revenue by 31 per cent. Just under half of this growth was generated by the acquisition of SilverSky. Management expects a similar level of commercial cyber sales growth in 2016 and profits to improve, following a period of significant recruitment and product development.

Heavy investment throughout the business, coupled with the previous year's receipt of £418m from the sale and leaseback of two buildings in Saudi Arabia, saw free cash flow plummet 59 per cent to £392m. Together with the cost of servicing the pension fund, that triggered a 38 per cent rise in net debt to £1.4bn. Prior to these figures, JPMorgan Cazenove anticipated adjusted 2016 EPS of 40.2p, rising to 43.9p in FY2017.

BAE SYSTEMS (BA.)
ORD PRICE:509pMARKET VALUE:£16.1bn
TOUCH:509-510p12-MONTH HIGH:549pLOW: 419p
DIVIDEND YIELD:4.1%PE RATIO:18
NET ASSET VALUE:94p*NET DEBT:47%

Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201119.21.4737.018.8
201217.91.2029.319.5
201318.20.425.220.1
201416.60.8823.420.5
201517.91.0929.020.9
% change+8+24+24+2

Ex-div: 21 Apr

Payment: 1 Jun

*Includes intangible assets of £10.1bn, or 320p a share