Strong, resilient and continuing a strategy based on delivering operational performance, investing in technology and driving competitiveness, BAE Systems excellent first half year results announced this morning are a confirmation of further significant progress made and confidence that the company has in its future.
Alongside considerable operational and financial detail, the interim statement conformed first half year sales of £10bn, up 6% on a constant currency basis, underlying EBIT up 27% to £1,028 million, the interim dividend raised by 5% and a £500m share repurchase programme. Operationally, financially and strategically these are an excellent set of first half results.
Underlying full-year EBIT guidance remains within a 3% to 5% range and full year free cash flow guidance of ‘in excess of £1 billion’ is unchanged despite sterling having strengthened. Improved first half year free cash inflow of £461 million set against the £1,1bn free cash outflow in the same period last year following a £1 billion injection that the company had made in to the UK pension scheme is notable. Important too is that group margins increased to 10.2%. An excellent set of interim results and with a strong balance sheet that BAE Systems has combined with excellent geographical spread of activities and forward strategy, the company looks very well placed in my view to achieve continued and sustainable growth.
Focussed and always committed to meeting customer requirements and objectives, BAE Systems is not only a company that has a geographically diverse portfolio of interests and world-leading capabilities but also a strategy that is well aligned and matched to fast-growing international defence budgets. With a highly skilled workforce of around 90,000 personnel in over 40 countries worldwide, BAE Systems is to my mind a ‘tour de force’ providing some of the world’s most advanced, technology-led defence, aerospace and security solutions. This is a company that has a built-in culture of adapting to change, one that continues to invest heavily in research and development technology led solutions for the future, improving customer performance and delivering shareholder value.
First half year EBIT improvements in Electronic Systems, Air, Maritime, Cyber & Intelligence were all very notable. In brief:
Electronic Systems which comprises the groups US and UK based electronics activities witnessed an excellent 15.6% return on sales and also benefited from a full half year contribution from last year’s acquisitions that included Airborne Tactical Radios in the US alongside that of improved programme execution.
Significant and interesting detail is provided within the interim statement. The Electronic Systems sector covers a huge range of products and services including Electronic Combat Solutions, C4ISR. Precision Strike and Sensing Solutions, Countermeasures & Electromagnetic Attack Solutions, Controls and Avionics and Power & Propulsion Solutions.
Although there was positive momentum in Platforms & Services (US) especially in regard of combat vehicle deliveries which have more than doubled compared to those in the first half of last year, while improvements in the US Ship Repair have been noted the company stated that work remains to be done in order to get back to pre-COVID-19 levels of performance.
The Air sector is performing in line with sales growth expectations this year. Production of rear fuselage assemblies for the F-35 Lightning II aircraft programme progresses towards targeted full rate production levels in 2021.
Production of Typhoon is currently focused on the Kuwait, Qatar and German Quadriga programmes along with providing Typhoon operators with ongoing support and training services and to deliver availability, maintenance and upgrade enhancements. Importantly, the Tempest technology maturation programme is progressing well and separately today the company announced that it had secured the first order for the Future Combat Air System Concept & Assessment Phase.
In more detail the interim results statement confirmed that activity on the 24 Typhoon and nine Hawk aircraft and associated support and training contract for the State of Qatar progresses well. The first three Hawk aircraft have completed their first flights. An agreement has been reached between the UK and the Qatari governments to base the Qatari Hawk aircraft at RAF Leeming, with entry into service planned in the second half of the year.
Four deliveries of major units under the Kuwait Typhoon contract, secured by Italian Eurofighter partner Leonardo, occurred in the period. The remaining Kuwait major unit deliveries are planned to be completed during 2022.
Maritime sector performance progress that had been witnessed through last year has been maintained and manufacturing work on the Type 26 programme in the UK continues apace with the first three vessels all in production. Construction of the first two Dreadnought submarines is progressing, whilst on the Astute programme, the fifth boat was launched in April and the remaining two are now in an advanced build state.
Intelligence & Security delivered growth in both sales and profit as performed well on long-term support contracts, some of which are on the most sensitive and critical US national security programmes. Importantly, Applied Intelligence delivered its strongest first half profit, benefiting from strong demand in the government sector and improved operational performance, together with the benefits realised from the restructuring in the prior year.
CHW (London – 29th July 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785