BAE Systems announced its trading update on Thursday where the defence company reiterated that its full-year 2022 guidance is “unchanged”.
BAE Systems noted £21.3bn in sales during 2021 and expects the group’s sales to grow 2-4% in 2022.
The defence company reported an underlying EBIT of £2.2bn and an underlying EPS of 47.8p last year, and now the group is expecting 4-6% growth for both EBIT and EPS.
For 2022, the group predicts a Free Cash Flow of greater than £1bn and assumes that the cumulative Free Cash Flow between 2022 and 2024 of more than £4bn.
All of the guidance predicted by BAE Systems is based on an exchange rate where £1 is equivalent to $1.38.
If the present dollar rate holds, earnings will be hampered, with EPS sensitivity of about 1p for every 5 cent change.
Overall, programme execution has been “good” across all sectors this year, however, its supply chains, delivery lead times, and people resources remain under strain across BAE System’s operations.
The group is continuing to mitigate the main financial implications following the group’s recommendations.
BAE Systems expects a solid year of order intake, and order flow has been positive thus far, particularly on its long-term programmes.
The majority of the orders they have received have a long cycle, which will help the group meet its growth targets in the next years and there is a pipeline of opportunities across all industries to strengthen the growth prospects.
Some major contracts include Lifecycle management and sustainment of the US Navy’s C5ISR systems, an 11-year contract for support to the UK’s Royal Air Force Hawk fleet and F-35 Lightning II EW systems.
BAE Systems Defence Spending
US
The forecast for spending in the United States is optimistic for BAE Systems. On March 9, the bill for the Fiscal Year 2022 Omnibus Appropriations was signed into law.
Many of its essential programmes, such as combat vehicles, the F-35 and other electronic warfare programmes are funded in this $743bn budget for FY22.
The President’s request for $773bn for the Department of Defense in Fiscal Year 2023 is well-matched with the present US National Defense Strategy readiness and modernization priorities of the US military services.
With the introduction of the National Defense Strategy in 2022, BAE anticipates continuing alignment.
UK
The Defence Command Paper in the United Kingdom reaffirmed pledges to large long-term programmes in sophisticated warships, submarines, and combat aircraft design and manufacturing, providing for long-term investment in these critical sovereign capabilities as well as substantial support for the cyber domain.
BAE Systems can support its UK customer’s objectives, and the opportunity pipeline is positive, with domestic, export, and collaborative potential highlighted.
Europe
In Europe, Germany’s large increase in defence spending is critical for long-term defence funding.
Other countries are growing or are projected to increase their defence budgets in response to the threat environment, and NATO countries are moving closer to, if not already at, their 2% GDP pledges.
Through BAE Systems’ positions on the Eurofighter Typhoon, the group’s participation in MBDA, its BAE Systems Hägglunds and Bofors companies in Sweden, and through US Foreign Military Sales, the group remain well positioned in the region.
Rest of the World
In the Middle East, BAE expects defence and security to remain a top concern due to its long-standing connections with governments and companies, as well as prolonged regional volatility and the nature of the group’s long-term contracts.
Renewals of existing long-term support contracts are progressing as planned, and BAE Systems continue to pursue several opportunities with current clients.
Through its Australian business, which is already expected to grow significantly owing to the group’s contracted roles and through export prospects from its UK, US, and Australian businesses to the area, BAE Systems’ portfolio is well-positioned to profit from increased defence spending in the Asia Pacific.
The Board of BAE said that the 2021 final dividend of 15.2p will be paid with shareholder approval on 1 June 2022 and the group’s interim results are expected in July.
Allegra Dawes, Senior Analyst at Third Bridge, said, “BAE reconfirmed their guidance for 2022 despite supply chain and logistical challenges. The company projects sales growth between 2-4% and earnings growth between 4-6% compared to 2021.”
“Defence spending across BAE’s key geographies is set to increase in coming years which will provide positive momentum for current and future program development.”
Regarding the Russi-Ukraine war, Dawes thinks that it is “unlikely to have a dramatic impact on demand for BAE systems” and added that their experts do not foresee “major capital investment any time soon.”
Dawes also said that Third Bridge’s experts predict “more countries committing to meet NATO’s defence spending target of 2% of GDP,” however, those countries, such as the United Kingdom would want to keep those capabilities within their borders.
BAE Systems’ shares have fallen 0.65% to 760p despite the company stating unchanged guidance for 2022 in their latest trading update.
