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STRONG SHOWING FROM BAE SYSTEMS

09 Aug 07. BAE Systems produced a strong set of results led by its U.S. Land Systems business and UK Programmes & Support.

First-half profit rose 27 percent, Net income rose to £515m ($1.05bn), or 15.5 pence a share, from (2006: £405m, or 12.4 pence). Sales rose 8 percent to £6.89bn, also beating estimates.

Highlights
– 43% sales growth in the Land & Armaments business
– Underlying earnings per share up 31.9% at 15.3p
– Interim dividend increased 13.6% to 5.0p per share
– Acquisition of Armor Holdings Inc. completed on 31 July
– Formation of UK naval surface ship joint venture announced

The company said it was “successfully identifying and accessing the higher growth sectors of the US defence market”, and that its US business grew 12 per cent in the first half of the year. Last month it completed the $4.1bn acquisition of US amoured vehicle maker Amor Holdings.

BAE Systems said it wanted to expand its share of the market for wheeled utility vehicles, as “the past distinction between frontline and support theatres of operation have become less distinct” and “increasingly the capability of these utility vehicles will converge with that of combat vehicles”.

The group said that US and UK military campaigns in Iraq and Afghanistan were supporting the demand for its products.

The strength of the U.S. Land Systems business continues with Bradley reset and MRAP orders continue to flow. The Armor Holdings acquisition should bolster this segment. However rumours that the DoD will recompete the FMTV truck requirement next year could prove a problem for BAE if the Stewart & Stevenson segment loses this huge Requirement to the new and growing ‘kid on the block’ International Truck. International has consistently beaten S&S to FMS truck orders for Iraq and Afghanistan and its MRAP business has 1000 vehicles on order.

In the U.K., the Land Systems Division has been saved by £100m worth of UORs at a time when the rest of the Division is suffering from a gap in the Order Book, loss of FRES and overcapacity. We understand that BAE has appointed consultants to rationalise the UK Plants. BAE continues to push the SEP Project with Sweden and other customers but, a lack of another partner could see the cancellation of this Project in 2008 and downsizing at Hägglunds which has just started its last bug CV90 order for the Netherlands.

INSYTE lacked a serious mention in these results and the sector appears to be struggling with the way forward. Quite clearly it has a huge Naval Systems portfolio with the combat systems for Type 45 and CVF placed and a strong radar segment with Sampson. However its land systems Division has failed to grow significantly beyond Falcon with Selex taking most of the jewels in the carve up

Outlook

Building on the strong first half performance, the previously anticipated good growth outlook for 2007 as a whole is expected to benefit further from the US-led Land & Armaments and UK Programmes & Support sectors where growth is ahead of expectations.

“BAE Systems is performing well and is committed to maintaining its focus on continued value generation and its drive to embed a high performance culture.”
BAE Systems’ performance continues to benefit from a combination of good, profitable growth and programme execution, as well as from the successful implementation of its strategy as the premier global defence and aerospace company. In particular, the Group is successfully identifying and accessing the higher growth sectors of the US defence market. In the first half of 2007 BAE Systems’ US-derived businesses achieved organic growth of 12%. The high tempo of military operations continues to generate growth in requirements for land systems in support of US and UK armed forces deployed on overseas operations.

The implementation of the Group’s strategy to establish a strong position in the land sector has been a notable success over the past three years, with both current and antic

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