BAE Systems Raises Guidance After Sales Jump on Defense Demand — Update

By Cristina Gallardo

BAE Systems raised its guidance for the year after posting a surge in sales amid high defense spending across all its key markets.

The U.K. defense and aerospace prime said Thursday that sales jumped 13% to 13.40 billion pounds, equivalent to $17.23 billion, in the first half of the year.

Orders fell to GBP15.1 billion from GBP21.1 billion, resulting in a record backlog of GBP74.1 billion. Orders were expected to stand at GBP16.69 billion, according to a consensus provided by Visible Alpha.

The London-listed manufacturer makes a range of increasingly sought-after military equipment, including combat vehicles, ammunition, missile launchers and artillery systems. It also provides cybersecurity services and electronic-warfare technology such as radio and radar jammers.

BAE is one of many European arms makers reporting surging sales since the start of Russia's large-scale invasion of Ukraine in February 2022.

In midmorning trading, shares in London were largely flat at 1,298 pence. The company's share price has surged 39% over the past 12 months and around 17% in the year to date, giving the company a market value of GBP39.245 billion, according to FactSet.

Chief Executive Officer Charles Woodburn said the group's order intake shows demand for BAE's products and services remains high and that the company is well-positioned for sustained growth in the coming years. Capital expenditure increased in the first half of the year, mostly on maritime and platforms and services, he said.

"The increased threat environment is global and we are seeing the strength of our broad geographic footprint," Woodburn said.

"A high proportion of our current and future long-term revenue and earnings profile is driven by helping our customers address global threats beyond the current Ukraine conflict. Our alignment to the U.S., U.K., Australian and Japanese defense strategies give us confidence in the long-term picture."

Net profit for the first half declined to GBP948 million from GBP965 million in the comparable period of last year, while underlying earnings before interest and taxes--the group's preferred measure of profitability--reached GBP1.39 billion compared with GBP1.26 billion. Net profit beat market expectations of GBP881.8 million, according to a consensus provided by Visible Alpha, while underlying EBIT surpassed a company-compiled consensus forecast of GBP1.365 billion.

BAE raised its guidance for 2024, saying it now expects sales to grow between 12% and 14%, after previously guiding for an increase of 10% to 12%. EBIT growth is expected to be between 12% and 14%, compared with a previous forecast for growth of 11% to 13%.

Woodburn said the company expects its Swedish and U.S. combat vehicles, Hunter-class frigate program, electronic-warfare and precision-electronic businesses to be major growth drivers in the near-term.

Beyond the near-term, an acceleration in the production of ammunition and a ramp-up in the program to supply nuclear-powered submarines to Australia as part of the country's Aukus trilateral pact with the U.K. and the U.S. will gain prominence, he said.

Aukus submarine construction will continue to accelerate through the end of the decade and into the next, as will the Global Combat Air Programme, a partnership with Italy's Leonardo and Japan's Mitsubishi Heavy Industries to develop a sixth-generation fighter jet.

Woodburn downplayed the impact of a review of defense spending in the U.K. following reports that it could result in cuts to some programs, potentially even GCAP.

Saudi Arabia has expressed an interest in joining the project, but only as an equal partner. "There's potential to increase the partnership, we would be perfectly happy to see that happening," Woodburn said. Leonardo's CEO Roberto Cingolani said in July that Saudi Arabia should be allowed to join the program if the kingdom is willing to make a significant contribution.

BAE's results were met with enthusiasm from analysts.

"We believe that BAE's organic growth will be stronger than many analysts expect in the next few years," J.P. Morgan analyst David H. Perry said.

Citi analysts had upgraded their rating on BAE shares to buy earlier this week amid expectations that its sales growth could extend beyond the next five years.

BAE said it had completed the third and final tranche of the GBP1.5 billion share buyback program set out in August last year.

The board declared a dividend of 12.4 pence, up from 11.5 pence.

Write to Cristina Gallardo at cristina.gallardo@wsj.com

(END) Dow Jones Newswires

August 01, 2024 05:06 ET (09:06 GMT)

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