Together with providing a trading update for investors last week BAE Systems gave a detailed and extremely interesting webinar presentation covering all aspects of its international business before concentrating on the fast growing and highly successful US electronics business.
A truly global group with interests spread widely across several continents, BAE Systems is not only the UK’s largest aerospace, defence and high-end technology group, it is one that is not only hugely successful at what it does, extremely important to the UK economy, exports, maintaining very necessary skills and on the back of that, ensuring that it is training those who will be required in the future.
BAE Systems strategy remains an exemplary example of doing things better today, achieving better performance and investing in its future. The growth strategy element is about investing in technology, thinking and planning forward, encouraging ideas, working with its military and other customers to ensure it remains at the forefront of its chosen technology development base. Consistency is never in short supply and the trading statement published last week is an example of that – information across all elements of the business, clarity and determination in ample evidence and well communicated. This is a company in my view that is set to achieve its objectives and continue to achieve good growth in the years ahead.
One fly in the ointment over recent years has been state of BAE Systems pension fund deficit so it was pleasing to hear from the company that following considerable efforts made over the past few years, pension risk had now fallen dramatically. To that end, BAE Systems told investors that it had completed its planned FY20 deficit funding with a £1bn contribution and it has also made an early settlement of the final £250m payment due in FY21. Since then, strong asset performance and rising bond yields have also led to “material reductions” to both funding and accounting deficits – indications given are that the decline is around 40%.
The trading performance message remains consistent with previous guidance and in line with expectations. Mid-term targets are unchanged but what was particularly interesting was that longer-term potential was to be further highlighted in a technology focussed capital markets webinar the following day. BAE Systems fundamentals are strong throughout and the trading statement emphasised all divisional activities are operating in-line with expectations and that orders are ahead of plan.
IF there was a concern expressed its was uncertainty over the dollar and that probably reasons why FY21 guidance was unaltered save for a small element of trimming related to EPS expectation in relation to currency albeit that tis may well be made up by further growth. That said, it is pleasing that the cumulative three-year free cash flow element of guidance of £4 billion was unchanged.
In respect of the technology based growth strategy BAE Systems management expressed confidence in respect of the post-C-19 pandemic demand outlook as it also did in respect of those elements of the group in the visibly increasing levels folio aligned to defence priorities being witnessed from many countries internationally as well as from here in the UK on the back of increased global threats.
The forward strategy is based on leveraging the strong incumbent positions that the company built in respect of technology capabilities. Within the Electronic Systems grouping which the company chose to emphasise in the Capital Markets presentation and that is based on meeting the increasing demands for intelligence, data, cyber security and a connected battlespace, across all military domains – land, maritime and air) along with the company continue invest in new and wider technology based threats such autonomous weapons, hypersonic weapons and the militarisation of space.
There is always more work to do and in respect of improving performance and margins the focus is emphasised on margin expansion and cash generation- margins being driven by mix (high growth in US Electronic Systems) while other areas of the business are expected to see improved operational performance being based on improved operational performance in activities such as US combat systems, the ship repair business and Applied Intelligence which the company has achieved an already remarkable level of improved performance over the past two years.
Other points that I would highlight include are some significant contract awards during the years to date which include;
F-16 Support – 10-year IDIQ
F-15 EPAWSS LRIP
Amphibious Combat Vehicle build CV90 Netherlands upgrade
BvS10 new vehicle build for Sweden
Military Code GPS modules
MBDA multiple awards
Maritime Future Support Contracts
RBSL – Challenger Tank upgrade
Commander Radar international sale
In summing up, BAE Systems is already world leader in electronic warfare and it has many others areas of technology advantage such as having one of the broadest capabilities in sea and subsea battlespace. The plan is to build on these and other technologies such as cyber, multi-domain capabilities, autonomy, space and sustainable technologies. Investment is aligned to customer focussed areas and in respect of military and defence, addressing the increasing threat environment in order to provide technology which is always one step ahead of those who would threaten us and that is able to meet and defend against a new range of physical threats defend against a new range of potential physical threats autonomous systems, hypersonic weapons and militarisation of space. within areas of the world where BAE Systems already has large scale interest such as the UK, US and Australia.
Platforms remain a key element of BAE Systems future be these ongoing subsurface submarines build programmes such as Astute and Dreadnought, surface ship programmes such as the Type 26 Global Combat ship for the UK and Hunter class vessels being built by the company in Australia.
Typhoon remains a hugely important programme for BAE Systems as does the work it does for Lockheed Martin as the UK’s Tier One partner on the Joint Strike Fighter Lightning 2 aircraft capability. And then there is Tempest – the Future Combat Air System (FCAS) – the next generation of military air capability that BAE Systems along with its international partners and the RAF are developing and which I will write on separately over the next few weeks.
The future in respect of military air power will be based on multi-domain capability – multi domain platforms with advanced sensing, data management, connectivity and autonomy. Add to this the important commitments and ambitions that the UK and other governments have made in relation to the space domain, in autonomous systems and the envisaged requirement for multi-domain autonomous systems.
I have merely touched a small surface on what BAE Systems is doing and how the company is looking to the future with such confidence. This is a UK based company and hugely important in respect of the role it plays in providing large scale UK sovereign based capability. But BAE Systems is much larger than just the UK – it is a huge player internationally. From Australia to North America, from the UK and Continental Europe to the Gulf Region, BAE Systems is a large and very important international player.
From where I sit, the future for BAE Systems certainly does look to be very exciting and very bright. BAE Systems is investing in its own future within a strategy that suggest absolute determination to grow and succeed.
CHW (London – 24th May 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785