Orders roll in for BAE Systems

The standout number in BAE Systems’ (BA.) half-year results, which perhaps best tells the tale of the changed nature of the world since it last reported numbers is the increase in new orders – up 70 per cent, to £18bn, taking its order backlog up to a record high of £52.7bn. 

Of course, some of this was anticipated and is part of longer term programmes – for instance, £4.9bn-worth of contracts providing training and support to the Royal Saudi Airforce and £1.8bn of orders linked to the European MBDA missile systems joint venture, in which BAE Systems has a 37.5 per cent stake. 

Many of the countries in which the company operates “have announced or are making plans to increase spending to counter the elevated and evolving threat environment”. In Europe, particularly, BAE Systems describes shifts in planned defence spending since Russia’s invasion of Ukraine in late February as being “profound,” given Germany's pledge to meet its NATO commitment of allocating 2 per cent of its budget to defence spending and the hurried attempts to admit Sweden and Finland into the alliance.

The sales figure favoured by BAE Systems increased by 5 per cent year on year to £10.6bn, which was 1 per cent above consensus forecasts, analysts at Berenberg noted. Underlying earnings per share were also 6 per cent ahead of consensus forecasts at 24.5p. Even its pension position improved, moving from a deficit of £2.1bn a year ago to a surplus of £900mn this time around.

The company left its full-year guidance, of a 2-4 per cent increase in sales and a 4-6 per cent rise in underlying earnings, unchanged and said it expects to generate £1bn of free cash flow this year, despite higher investment in R&D to keep pace with a threat environment that is “constantly evolving”.

Little wonder, then that after increasing its interim dividend payout by 5 per cent the company felt confident enough to launch a £1.5bn, three-year share buyback programme.

BAE Systems’ shares have jumped by around 40 per cent so far this year to trade at 14.5x consensus forecast earnings, higher than their five-year average of 12x but by no means prohibitive. More importantly, the orders currently rolling in, and its embedded position within existing defence programmes, should allow the company “to grow our sales profitably and increase cash conversion in the coming years”, it said. We agree and maintain our buy.

Last IC View: Buy, 632p, 24 Feb 2022