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BAE Systems – RISING TO NEW CHALLENGES

BAE Systems – RISING TO NEW CHALLENGES
By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

20 Feb 14. FY13 results for BAE Systems in summary – revenue up 2%, underlying EBITDA up 3%, EPS up 9%, dividend raised 3% and in total, £850m returned to shareholders during the year. An all round fantastic achievement then within an industry that is after all being forced through affordability circumstances of the customer governments to adapt and change to meet the various new challenges. BAE Systems is well used to the needs of continually adapting to a constant process of required change. Importantly, as the company moves through yet another period adapting to changing global defence market circumstances it does so from a very well invested position and one also of considerable financial and managerial strength.

Given the challenges with the current defence market internationally I take the view that the FY13 results were excellent. Clearly, prospects for the current ahead look tougher than those for the one immediately past. But there is ample reason for confidence too and in defence it is always as well to remember that there are just as many growing international markets opportunities as there are those shrinking. Whatever, on the back of proven excellence, a well defined strategy, an excellent order backlog, strong cash flow and superb balance sheet my view is that medium and long term positives far outweigh the short term negatives.

With minimal net debt and being a truly international player engaging in a variety of markets some of which are moving in a quite opposite direction to those that are seemingly cutting back on defence related spend I believe that BAE Systems has an excellent balance of opportunity. No one denies that the next couple of years will be tough but with a well defined strategy and continuing strong drive BAE Systems is in my view in a very strong position to ride out mature market storms. The UK is a classic example and one where despite large scale cut backs in defence it now has increased clarity and understanding with its government customer to see its way through the next few years. While the US will clearly be weaker than in the more recent past over the next few years international market opportunities in the Gulf States and further afield remain very strong. With the strength of an excellent balance sheet together with strong cash flow and the excellent record of rewarding shareholders the future for BAE Systems still looks very bright.

Non-recurring benefit from settlement of the ‘Salam’ price escalation discussions that had been separately announced yesterday and that appears within the FY13 results will of course have a negative impact on FY14 results. The company anticipate that the impact of this will likely reduce the FY14 earnings per share by somewhere between 5% and 10%. The company has also taken the opportunity to take a non-cash goodwill impairment charge of £865m to take account of lower defence spending in the US and increase in the weighted cost of capital.

In terms of the overall company outlook the excellence of FY13 results in the UK and that are centred on a small number of large defence programmes that have excellent long term visibility provide an interesting and positive forward view. During the past year the first Tranche 3 Typhoon aircraft was flown and deliveries to the European partner nations and export customers continued apace. Work on sizable export orders for Hawk fast jet trainer began and there was a significant agreement with HM Government allowing measures to enable restructuring of its navy ships business including changes to the existing Queen Elizabeth class aircraft carrier contract that reflect changes and increased maturity of work on the project in hand together with agreed rationalisation of the navy shipyard business was also agreed during the year. In addition large scale work on the F-35 joint strike fighter continues at Sa

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