Having delivered another year of solid operating performance, BAE Systems FY18 results presentation today have, on the back of a strengthened growth outlook, provided investors with a combination of clear strategy and excellent visibility for future performance enhancement.
Posting results consistent with previous guidance and that although relatively flat in in earnings terms clearly demonstrate progress being made on strategy delivery and importantly, that strategic priorities now embedded throughout the group are being realised, is extremely welcome.
While year on year cash flow numbers for an international company such is this can and often are variable and dependent on a number of different factors, the bottom line is that BAE Systems is a company that remains financially very strong.
Better programme execution, emphasis of the potential benefit of technology plans now in place that fully support sector strategies, of operational performance enhancement and better programme execution combined with the 15th consecutive year of dividend growth are consistent with my own view that BAE Systems can move forward from here on the back of a strong balance sheet to what looks to be a very exciting future.
It is a pity therefore that in a year that has laid down very visible foundations for a period of strong and sustainable future growth that BAE Systems shares initially declined this morning on the back of the company acknowledging in its statement that it continues to be reliant on the approval of export licences from a number of governments in order to continue supplies to its Saudi Arabia government customer.
The export licence issue to which the company referred is one for governments alone to address and the point to emphasise here is that it is in the interests of all Eurofighter Typhoon partners – UK, Italy, Spain and Germany – that governments address the issue raised as a matter of absolute priority.
Back to the future and suffice to say that BAE Systems is a company that is as resilient as it is also diverse. With underlying strategic priorities being those of achieving operational excellence and competitiveness combined with building on the back of a continuous process of investment in technology and innovation, this si a company very well placed for the future.
Maintaining and growing the defence business, continuing to place emphasis on growing business in adjacent markets whilst at the same time, further developing and expanding international business demonstrate a consistency of strategy that will, in my view, play out very well for BAE Systems in the years ahead.
During 2018 BAE Systems has achieved a significant number of business ‘wins’ across the group. These ‘wins’ come on the back not only from a well-defined strategy and improved competitive ability but they are also recognition of the very high standards that BAE Systems is now achieved in programme execution and delivery.
The huge increase in order intake rising from £20.2 billion in FY17 to £28,2 billion in FY18 combined with a record order backlog up from £38.7 billion in FY17 to £49.4 billion for FY18 are key highlights from the FY18 results but so too is emphasis on the very strong order pipeline. For the current year BAE Systems expects mid-single digit growth in underlying earnings per share.
In respect of 2018 order announcements, the year was one of the most exciting that I can personally ever remember in decades of following BAE Stems. This bodes well for the medium and long term future. Importantly, during last year the company signed contracts for the Type 26 design to be used on the Canadian Surface Combatant programme and also won the design and build for nine ships based on the Type 26 for Australia’s Future Frigate Programme.
In addition BAE Systems received funding for the seventh and final Astute class submarine from the MOD along with further funding for the Dreadnought SSBN submarine programme. Work progressed on the first of the planned eight Type 26 frigates for the Royal Navy and in the air domain the company won orders from Qatar for the build of 24 Typhoon and 9 Hawk aircraft while its US operation won the Amphibious Combat Vehicle for the US marine Corp and the development phase of the Mobile Protected Firepower programme.
These wins come on top of the ongoing support services work for Typhoon aircraft in service with many air forces together with continuing production work on the F-35 Joint Strike Fighter where the company is very well placed long term not just in the delivery of major components but also in through life MRO support. Manufacturing a wide and sophisticated range of defence and aerospace avionics technology equipment the Electronics Systems business is an often unsung hero of BAE Systems business activities.
Particularly pleasing in the FY18 results was confirmation that the company achieved its targeted break-even in Applied Intelligence. The strong performance in Electronic Systems and Air were offset to a degree by disappointment in Maritime – this caused by the need to take a £47 million hit on problems related to the Offshore Patrol Vessels under construction for the Royal Navy – and some necessary restructuring of the US Platforms and Services business in order to ready it for an anticipated growth phase.
Given the more positive outlook for defence spending and subsequent visible increase in actions now being taken by governments to enhance defence capability I take the view that, having won a number of key defence programmes during the year in Canada, Australia and Qatar that BAE Systems is well placed to add additional countries to that list over the next few years.
Bottom line for me is that BAE Systems looks very well placed for the future.
CHW (London – 21st February 2019)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785