Defence played out pretty much as expected last year. Flares and countermeasures specialist Chemring (CHG) issued profit warnings like confetti and ongoing US budget speculation wounded sentiment. Still, the opening salvo of a much-rumoured round of consolidation has been fired and everyone is in play.
Politicians and influential shareholders may have brought down BAE's (BA.) planned merger with EADS mid-air, but bid speculation will remain a favourite pastime in 2013 and the British giant is not immune. In the meantime, the aerospace & defence group may use a big advance for last month’s £2.5bn jet order from Oman to bankroll an earnings boosting share buy-back alongside February’s final results.
Even Chemring is beginning to look interesting. New boss Mark Papworth is a man on a mission and has brought in Steve Bowers, a finance chief with M&A experience at Umeco, to repair the ship. A turnaround plan – and possible catalyst – is likely within days.
Clarity on US military spending, however, will take longer and cuts of more than $52bn (£32.5bn) this year loom if lawmakers can’t agree a workable deficit reduction plan. That makes it almost impossible for contractors to make sensible forecasts alongside upcoming results, and especially tricky for Ultra Electronics (ULE) and Cobham (COB) who both rely heavily on US work.
Exports offer a glimmer of hope. Geopolitical tensions in the Middle East and Asia should get regimes there spending. Defence budgets in India, Saudi Arabia and Indonesia are all tipped to grow by at least a fifth over the next few years, and by even more in Brazil. Stand back as our boys fight for a slice of the pie.
Life is easier for the civil aerospace crowd who look odds on to outperform defence for a fourth consecutive year. After a sluggish 2012, growth in traffic and airline profits should create more after-market work for Meggitt (MGGT) and Senior (SNR). What’s more, both Boeing and Airbus have what it takes to ramp up production sharply this year and next. New orders should keep flooding in too.
They’re tipped to add a combined 1,300 aircraft in 2013, mostly narrow body planes like the A320neo and Boeing 737 Max, to a backlog of over 8,500 planes. Air Canada has promised to order at least 100 jets and other European and Asian carriers will surely follow. Deliveries are expected to increase by up to 10 per cent.
That makes another re-rating inevitable, according to analysts at Deutsche Bank, since mid-cycle earnings multiples look too modest for an industry enjoying strong demand and great visibility. More appropriate peak multiples are two points higher.
| COMPANY NAME | LATEST PRICE (P) | MARKET VALUE (£M) | PE RATIO | DIVIDEND YIELD (%) | PERCENTAGE CHANGE IN 2012 | LAST IC VIEW |
| BAE SYSTEMS | 351 | 11,394 | 7.7 | 5.5 | 18.2 | Hold, 326p, 8 October 2012 |
| CHEMRING | 238 | 461 | 5.3 | 6.8 | -42.6 | Hold, 240p, 28 November 2012 |
| COBHAM | 223 | 2,404 | 11.9 | 3.9 | 20.4 | Hold, 194p, 13 November 2012 |
| MEGGITT | 403 | 3,162 | 11.9 | 2.7 | 8.4 | Buy, 402p, 7 August 2012 |
| QINETIQ | 186 | 1,230 | 11.4 | 1.7 | 38.4 | Hold, 192p, 21 November 2012 |
| ROLLS-ROYCE | 911 | 17,047 | 17.9 | 2 | 19.6 | Buy, 883p, 27 July 2012 |
| SENIOR | 207 | 858 | 12.9 | 1.9 | 16.7 | Buy, 179p, 23 July 2012 |
| ULTRA ELECTRONICS | 1,689 | 1,172 | 13.7 | 2.3 | 12.6 | Hold, 1,494p, 19 November 2012 |
