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BAE Systems – Driving Performance, Growth and Future Opportunity By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

Confirming a 7% improvement in FY19 Sales, a 5% increase in EBITA (Earnings Before Interest, Tax and Amortisation) on a constant currency basis, a sizable increase in operating cash flow, a corresponding fall in net debt to £743 million together with a 4.5% increase in the annual dividend show not only that BAE Systems met guidance but more importantly, that this is a company looking forward into the future with confidence.

Through a strategy of driving operational excellence forward, improving competitiveness and efficiency and leveraging from a range of innovative advanced technology BAE Systems is in good heart. Improved efficiency across all areas of activity lies behind the excellent FY19 results and combined with increased investment across the extensive range of defence related business activities combined with reshaping the portfolio provides ample evidence to me that the company has underpinned a forward growth strategy that will deliver.

Operational and strategic based actions taken during the year have clearly better positioned the company to achieve its medium and long term aims for the future and while geo-political uncertainties will always remain in a business such as this, being well placed in so many large individual international markets can only be seen as being a major advantage.

A strong order backlog and programme visibility are hugely important and the previously announced proposed acquisitions of the Collins Aerospace Military Global Positioning business together with those of Raytheon’s Airborne Tactical Radio businesses add intensity to a belief that this is now a company  that is well placed to achieve sustainable ongoing levels of growth in the years to come.

While there is an underlying confidence throughout the FY19 results there is still a lot more to be done. This is a company that has no intention of standing still and the determination to further improve operational programme performance that is writ large through the FY19 statement combined with what can only be described as a company that has a diverse international portfolio combined with scope to grow and develop from ongoing research-based technology innovation demonstrates not only a company investing in itself for future advantage but also one that stands this one out form the crowd.

The proposed US based acquisitions mentioned above add significant flavour to a forward strategy that is well designed and thought out and that provides abundant potential. The very diverseness and range of product activity spread and markets across the Air, Maritime, Electronic Systems, US Platforms and Services and Cyber & Intelligence business activity is huge and it is this that provides me, as a long-time analyst of the company, with confidence that BAE System is very well positioned to achieve its aims.

Make no mistake, this is a well-managed company and one that is deserving of success. It may not have got everything right in the past but be in no doubt that it has learned from its past mistakes and one that is determined to continue improving operational performance across its many different programmes.

With further operational performance likely to be seen during the current year, strong market positions and a forward strategy that consistent and combined with acquisition intention and opportunity, BAE Systems is in my view well placed not only to achieve its short and medium term aims but also one that has the ability, strength and determination to accelerate its growth-based strategy. While there are and will no doubt be challenges ahead as exampled by the uncertainty created by the upcoming review of defence in the UK, BAE Systems has the good fortune to be operating within an international industry in which it is more than well-paced to serve and create further opportunities.

In terms of revenue by destination, the US was the largest market accounting for 43% of BAE Systems sales last year. By contrast, the UK accounted for 22% of sales by destination, Saudi Arabia 13%, Australia 3% and the rest spread across a range of countries.

In Australia where BAE Systems has a very long history of active involvement in-county and where the company is at the early stages of the Hunter class frigate programme development and on which levels of business activity are likely to double over coming years, remains one of great opportunity. Elsewhere, in the Gulf Region Qatar, in which BAE Systems is well placed on Typhoon and Hawk programme build and where the company also agreed a contract amendment that will accelerate Typhoon deliveries during the year.

Oman, where the company has over recent years delivered Hawk and Typhoon aircraft capability in recent years together with infrastructure and other support and in the Kingdom of Saudi Arabia, where the company continues to manage licence positions successfully in relation to long-standing support contracts, supporting the internal 2030 vision and where the first four Hawk aircraft assembled in Kingdom were accepted and entered service with the Royal Saudi Air Force during the year.

In Kuwait, where through the Italian Government/Leonardo won order for 28 Typhoon aircraft and on which aircraft build BAE Systems has a significant build workshare on the aircraft, the first eight have now been delivered.

Other international programme opportunities for Typhoon remain under discussion. Separately, progress continues on the collaboration for the design and development phase of an indigenous fifth generation fighter jet for the Turkish Air Force. 

In the UK the last Typhoon aircraft from the Tranche 3 batch was delivered to the Royal Air Force last year and on maritime the 5th and final Offshore Patrol Vessel for the Royal Navy is expected to be handed over in 2020. Progress of Type 26 ASW frigates for the Royal Navy continues with worth on the second of eight proposed ships having now started and work on the first, HMS Glasgow, moving ahead with pace. While there has been some delay in completion of the fourth Astute class submarine to the Royal Navy work continues apace on the three remaining boats and during the year the company received a further funding for the Dreadnought programme on which revenue now exceeds that of Astute class.

In respect of other large-scale UK based activity, the company delivered 142 rear fuselage units for the Lockheed Martin F-35 Joint Strike Fighter programme making a total over 600 having been delivered on the programme so far.  

Separately, the Tempest technology maturation programme between the UK government and industry partners including BAE Systems, Rolls-Royce, MBDA UK and Leonardo continues apace. During the past year the Governments of Sweden and Italy both joined the international programme and have committed to working with the UK to develop this quite excellent next-generation combat air capability development. The company along with partners will play an increasingly important and growing role on the F-35 sustainment programme including supply of spares and technical support, software products, upgrades and specialist manpower services over the coming years. 

I cannot detail here all of the many and varied international land, maritime, air programmes along with Electronic Systems, Platforms and Services US, Cyber & Intelligence activities but suffice to say here but results show that most are doing well or have improved. However, I will mention that the UK MOD has now awarded the £2.3bn contract to provide the British Army with over 500 8 x 8 armoured vehicles to Artec GmbH, comprising Rheinmetall and Krauss-Maffei Wegmann. Rheinmetall and that they will subcontract approximately half the production to the Rheinmetall BAE Systems Land (RBSL) partnership which will undertake vehicle structure fabrication, assembly, integration, and test of the vehicles at its Telford facility.  

Bottom line is that whilst there is no room for complacency the future for BAE Systems looks very interesting. This is a business well used to dealing with uncertainties be they internal political or geo-political and that will undoubtedly continue to arise in the years ahead. But perhaps what pleases most about this company is the visible determination to succeed and, in the process, one that will continue to create more interesting opportunities in the years ahead.

CHW (London – 20Th February 2020)  

Howard Wheeldon FRAeS 

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue  

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