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BAE to flatline despite increased F-35 payback

The defence contractor is starting to see increased activity linked to the F-35 programme
February 22, 2018

The apparent eagerness of governments to ramp up defence spending once again emerged as the main message to come out of BAE Systems’ (BA.) latest results statement. New chief executive Charles Woodburn has been busy restructuring the business to help counter rising competition and reduced activity on the Typhoon and Hawk aviation production lines, and is now confident that Europe’s largest defence contractor is ideally positioned to reap the full benefits of the UK and US’s growing (and evolving) military aspirations.

IC TIP: Buy at 585p

Management clearly hopes that a bullish long-term outlook statement will make another year of stable progress easier to digest for investors. Strip out a substantial £384m impairment charge, issued to reflect lower growth assumptions for the group’s cyber security business, and adjusted profits at constant currencies rose a steady 4 per cent to just over £2bn.

Earnings were mainly boosted by gathering demand for the controversial F-35 fighter (BAE is one of the lead partners) and laser-guided rockets. Management expects the electronic systems arm to continue generating the majority of growth in 2018, alongside the group’s combat vehicles and weapons systems operations. However, with Typhoon aircraft building projects coming to an end, BAE is guiding for flat earnings through 2018.

Prior to these figures, JPMorgan gave adjusted profits of £2.1bn for the December year-end, leading to EPS of 42.9p.

BAE SYSTEMS (BA.)   
ORD PRICE:585pMARKET VALUE:£18.6bn
TOUCH:584-586p12-MONTH HIGH:683pLOW: 534p
DIVIDEND YIELD:3.7%PE RATIO:22
NET ASSET VALUE:149p*NET DEBT:16%
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201318.200.425.220.1
201416.600.8823.420.5
201517.901.0929.020.9
201617.791.1528.821.3
201718.321.1326.821.8
% change+3-1-7+2
Ex-div:19 Apr   
Payment:1 Jun   
*Includes intangible assets of £10.4bn, or 325p a share