BAE Systems beats expectations

Earnings were flattered by the aerospace and defence giant’s recognition of a tax benefit of £161m, which related to agreements reached concerning an “overseas tax matter”. This figure was net of a provision taken in response to an EU Commission decision regarding the UK's Controlled Foreign Company regime. In April, the commission ruled that the tax regime unduly exempted a number of multinational groups, including BAE, from the UK regime and that this was illegal under EU state aid rules. “There remains uncertainty surrounding HMRC's likely approach” to the assessment and recovery of funds from BAE, the group said.

BAE is progressing with a revised schedule for its M109A7 combat vehicle, following a series of challenges to production that have dogged the system. In its US platforms and services arm, “first-half cash flow, while slightly better than last year, reflects the significant working capital held in the combat vehicles business”, according to management.

While net debt soared to £1.9bn from its year-end level of £904m, BAE expects this figure to settle back around its previous total (it was also at £1.9bn at the end of its 2018 first half). The group continues to target over £3bn in free cash flow between 2019 and 2021.

Bloomberg consensus forecasts are for full-year 2019 adjusted EPS of 44.7p, rising to 47.8p in 2020.