Once again delivering superb performance, BAE Systems half-year results to the 30th June highlight the strength of this superbly run global defence company. With sales up 11% to £12bn, underlying earnings before interest and taxation up 10% to £1.3bn, Free Cash Flow of £1.3bn and raised full-year FCF guidance increased by £600m to £1.8bn, a further three year share buyback programme worth £1.5bn, dividend increased by 11% to 11.5p and raised FY23 EPS guidance of between 10% to 12%, BAE Systems looks set fair for a very interesting period ahead providing shareholders with further growth and sustainable profits.
First half year order intake was £21.1bn and the company ended the period with a record order backlog of £66.2bn. Net debt at the end of the period stood at £1.8bn and net assets at £10.8bn. The pension surplus was little changed at £638m.
Operational Highlights
In May, the Czech Republic awarded BAE Systems Hägglunds a contract to produce 246 CV90 Mk IV infantry fighting vehicles in seven different variants. The contract is valued at £1.8bn. The CV90s which is a truly remarkable military vehicle will be developed and delivered through an industrial partnership with Czech industry to meet the requirements of the Czech Ministry of Defence and the intention of maintaining national sovereignty for the Czech Republic.
Operational Progress
In Electronic Systems, BAE Systems new and highly invested facilities, opened in: Manchester, New Hampshire; Cedar Rapids, Iowa; and Austin, Texas, are now providing world-class work environments that support innovation, production and teamwork, which will help us to continue to deliver cutting-edge technology to our customers.
The Combat Mission Systems business, within the Platforms & Services sector, once again received the James S. Cogswell Outstanding Industrial Security Achievement Award from the Defense Counterintelligence and Security Agency (DCSA) for two of its facilities. This award has a rigorous selection process with only 19 facilities receiving the award from around 13,000 cleared facilities.
In the Air sector, activity on both the Typhoon and Hawk programmes for Qatar continues. During the first half period, four Typhoon aircraft deliveries took place. A total of 12 aircraft of an order for 24 are now in service with the Qatar Emiri Air Force.
MBDA in which BAE Systems has a 37.5% has been contracted by the Polish Armament Agency to supply Launchers and Common Anti-Air Module Missiles (CAMM) for Poland’s PILICA+ Air Defence upgrade programme. The contract is the largest European short-range Air Defence acquisition programme in NATO.
In the BAE Systems Maritime sector, the fifth Astute class submarine, HMS Anson, departed for the Submarines site in Barrow-in-Furness during February to begin sea trials with the Royal Navy. The steel cut ceremony for the fourth of eight Type 26 frigates, HMS Birmingham, took place during April.
Strategic Progress
During H1 the company continued to deliver against its strategic priorities in order to drive operational excellence; continuously improve competitiveness and efficiency and advance and further leverage our technology. Examples of this in the period include:
In March and as part of the AUKUS trilateral programme between Australia, USA and UK it was announced that BAE Systems would play a key role helping Australia to acquire its first nuclear powered submarines. The three nations have agreed to deliver a trilaterally-developed submarine, based on the UK’s next-generation design, incorporating technology from all three nations. Australia and the UK will operate SSN-AUKUS as their submarines of the future, with construction expected to begin this decade.
The company has received new investment from the Ministry of Defence in order to boost technologies for the UK’s future combat aircraft. The contract extension, worth £0.7bn, will build on the innovative science, research and engineering already completed under the first phase of the contract delivered by UK Tempest partners – BAE Systems, Leonardo UK, MBDA UK and Rolls-Royce.
BAE Systems and Heart Aerospace, a Swedish electric airplane maker, announced a collaboration to define the battery system for Heart’s ES-30 regional electric airplane. The battery will be the first-of-its-kind to be integrated into an electric conventional take-off and landing (eCTOL) regional aircraft, allowing it to efficiently operate with zero emissions and low noise.
BAE Systems and Microsoft have signed a strategic agreement aiming to support faster and easier development, deployment and management of digital defence capabilities for our customers.
Forward Guidance
Having raised full year earnings guidance BAE Systems confirmed that its has enjoyed good divisional operational performance and demand from all of its major markets including the USA, Saudi Arabia, Australia and the UK. By any standards imaginable these are excellent results and while caution is always a watchword withing BAE Systems, the outlook for further improved and sustainable performance in all of the many global and home markets that the company served looks excellent.
Charles Woodburn, Chief Executive:
“We’ve delivered a strong financial performance in the first half of the year, thanks to the outstanding efforts of our employees. Our global footprint, deep customer relationships and leading technologies enable us to effectively support the national security requirements and multi-domain ambitions of our government customers in an increasingly uncertain world. With a record order backlog and good operational performance, we’re well positioned to continue delivering sustained growth in the coming years, giving us confidence to continue investing in new technologies, facilities, highly-skilled jobs and in our local communities.”
Key Drivers behind long term growth outlook
As I have already alluded, BAE Systems is in my view well-positioned for good sustained top line growth. There is scope to accelerate this and the long-standing customer relationships enjoyed together with visibility of value generators, programme performance and a well-defined operating model all play to this.
Additionally, reputational excellence, growing international defence budgets, massive order backlog, leading defence related franchises, diverse geographical footprint, being a leader in disruptive technologies and with further cash available to deploy when circumstances arrive are all important factors and that the company rightly sees will allow further opportunities to grow.
BAE Systems is large and very international company with several ‘home markets’ and abundance of multi decade programmes in which it is engaged. This emphasises the long- term embedded value. Add to this huge geo-graphical diversity, unique global portfolio of operations, retrofit and technology upgrades, existing and future sustainment and support, opportunity additional new build orders and a funded order backlog and being within a world of ever increasing geo-political uncertainties and it becomes easier to see why BAE Systems stands out.
BAE Systems has a long history of investing in its busines and its people. The company has taken on an additional 3,000 personnel during the year and continues to invest and emphasise considerable efforts on its highly respect graduate trainee and apprenticeship programmes.
Finally, I would list the importance that BAE Systems emphasises the importance not only of research and development investment but also CAPEX and which in regard of the latter, £300 million was invested during the H1 period.
CHW (London 2nd August 2023)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785
Skype: chwheeldon
@AirSeaRescue