BAE Systems reports record orders amid uncertain world

The more uncertain geopolitical environment isn’t great news for the world at large, but it means the orders keep rolling in for BAE Systems (BA.). 

The company topped last year’s huge order intake, bringing in a record £37.7bn of new work. It has generated almost £75bn of orders over the past two years and its current backlog stands at £69.8bn.

Although most of this relates to programmes that pre-date the conflict in Ukraine, “orders to restock and upgrade heavy armour and munitions are starting to come through”, chief executive Charles Woodburn said.

Two of the deals – the £4bn Aukus order for a new generation of nuclear subs and the GCAP programme to deliver stealth fighters alongside Italy’s Leonardo (IT:LDO) and Japan’s Mitsubishi Heavy Industries (JP:7011) – will “shape the business for years to come”, Woodburn said.

Another is the $5.5bn (£4.35bn) acquisition of Ball Aerospace completed last week, which brings “a step change in our capabilities in the growing space sector”, he added.

BAE Systems has already stumped up $1.5bn in cash to fund this, and has a $4bn bridge loan in place to cover the rest. Finance director Brad Greve said the company expects to replace this via the bond markets “in due course”.

Net debt stood at around £2.5bn at the end of last year, or £1bn excluding leases, but cash generation was strong. Even after a £270mn increase in net capex and the addition of 6,700 workers, free cash flow increased by £643mn to £2.6bn. 

The addition of Ball means revenue and underlying operating profit growth are expected to nudge up, by 10-12 per cent and 11-13 per cent, respectively. Guidance is for earnings per share to be lower at 6-8 per cent, though, which UBS analysts attribute to integration costs. Free cash flow is expected to fall to £1.3bn.

Perhaps this explains the muted reaction to the results, with BAE Systems’ shares down 3 per cent in early trading. Some profit-taking is also understandable, given the shares are up 36 per cent over the past 12 months and have doubled since Russia’s invasion of Ukraine two years ago. 

This means their historic discount to global peers has now gone, and at 19 times broker Investec’s forecast earnings, they trade at a slight premium to the likes of Lockheed Martin (US:LMT) and Northrop Grumman (US:NOC). Although increased commitments from European governments are still filtering through, it's hard to maintain the view that BAE Systems' shares are underpriced. Move to hold.

Last IC view: Buy, 1110p, 14 Nov 2023