Thanks to the Ukraine war, BAE Systems has turned from pariah to saviour among many fastidious investors. President Zelensky’s latest appeal for more materiel, on the second anniversary of Russia’s invasion, has renewed the focus on arms manufacturers. The timing could hardly have been better when BAE Systems, which builds a range of weapons from Eurofighter Typhoon jets to nuclear submarines, missiles, bombs and bullets, chose last week to unveil buoyant annual results.
Sales and underlying earnings before interest and tax both rose by 9 per cent, to £25.2 billion and £2.68 billion, respectively, taking its earnings per share from 55.5p to 63.2p and prompting a rise in this year’s dividend from 27p to 30p.
Notably, during 2023 the British government demanded an eightfold increase in 155mm shells, the Czech Republic ordered 146 CV90 infantry fighting vehicles and BAE delivered ten Eurofighter Typhoons to the Qatar Emiri air force. In December, the company signed a ten-year contract for up to $8.8 billion to manage the US army’s main ammunition plant in Tennessee. This month it snapped up Malloy Aeronautics, a drone specialist, just as the government unveiled a strategy to support the development and deployment of uncrewed systems.
Charles Woodburn, the chief executive, looked ahead to three developments that he sees offering “multi-decades of opportunities”: the next generation of submarines; an agreement with Japan and Italy to build the ultra-sophisticated Tempest fighter jet; and the $5.5 billion takeover of Ball Aerospace, the Colorado-based spacecraft and satellite maker.
So there is plenty going on, in an encouraging environment for arms spending. The biggest cloud comes from the balmy years when voters thought war was a thing of the past and taxes could be devoted to domestic issues. Consequently, governments now fear that their electorates will not take kindly to diverting that money, and raising more tax or debt, to increase military spending. Donald Trump continually goads Nato countries that have not raised their commitments to the agreed 2 per cent of gross domestic product on defence, and America’s contributions to Ukraine are hampered by congressional manoeuvring. Despite those obstacles, BAE’s order backlog is £69.8 billion, equal to 2.7 times last year’s sales, more than enough to keep the wheels turning.
Advertisement
Woodburn said: “Our performance, combined with our global footprint and record order intake, mean we are well-positioned for sustained growth in the coming years, whilst delivering increased value to our shareholders and the communities where we operate.”
In terms of sales and profits, the biggest division is air. While maritime comes second by sales, its margins are only 7.7 per cent, leaving electronic systems’ 16.1 per cent margin to take its profit up to second place with £878 million. The baby of the pack, cyber and intelligence, with £2.3 billion sales and £199 million pre-tax earnings, is growing fast and is packed with potential. The Donbas battlegrounds are a running test base for the latest developments.
The company is forecasting a rise in 2024 sales of more than 10 per cent, taking underlying pre-tax profit up by between 11 per cent and 13 per cent and underlying earnings per share by 6 per cent to 8 per cent. Those numbers disappointed analysts, but they may say more about Woodburn’s caution than the company’s health.
Jefferies, the investment bank, sees BAE’s enterprise value falling from £40 billion to £36.7 billion by 2027, not an entirely negative trend as it will be because of share buybacks and debt shrinking by £800 million. As there will be fewer shares to cater for, that will help to boost earnings per share from 63.2p to 89.79p for 2027, taking the price-earnings ratio down to 13.6. A likely dividend of 42p by then will add up to a 3.6 per cent yield at the present share price, compared with today’s 2.4 per cent.
This column has consistently recommended the shares, most recently last June, since Russian boots first marched into Ukraine. While there would be no harm in taking some profit, there should be more mileage in the shares if Europe and the United States come anywhere near their promises to Ukraine.
Advertisement
Advice Buy
Why The share price has further to go to keep up with events
Hargreaves Lansdown
Hargreaves Lansdown is at a crossroads. Shares in Britain’s largest wealth manager plunged from £23.63 in May 2019, eight months before Covid, to £7 last October, two months after installing Dan Olley as its new chief executive. Much rests on his shoulders to reverse the slide.
A clue to where Hargreaves Lansdown is heading lies in Olley’s background: digital technology. After spells at Relx, the technical publisher, IBM, the American technology group, and WPP, the advertising conglomerate, in January last year he became chief executive of Dunnhumby, a data analytics firm. His willingness to change jobs so quickly raises a yellow flag.
To make his mark, Olley has written off £17.3 million on ditching two computer systems and bringing in a new digital technology team, the third since last March. Although he has no previous experience in managing money, he says he intends to use Hargreaves Lansdown’s digital capabilities to help to understand which products best suit each client, rather than to replace the human element of the advice process. And he emphasises the importance of “delighting” clients and “enhancing the client experience”. We shall see which triumphs, data or the personal touch.
In the last six months of 2023, there was £1 billion of net new business, £600 million less than a year ago, while total assets under administration rose to £142.2 billion, up from £127.1 billion. Revenues rose by £18.2 million to £368.2 million, but that was not enough to prevent pre-tax profits falling by £15.1 million to £182.5 million. The firm recruited 20,000 net new clients, making a total of 1.82 million. This was down on the 31,000 attracted in the corresponding period of 2022, possibly because the higher cost of living has left less cash to invest. All of which gives Olley a formidable to-do list.
Advertisement
Deutsche Numis has trimmed its year-end earnings-per-share forecast from 68.5p to 66.9p, and by 4 per cent next year to 70.3p. However, the shares are on only 11.2 times 2023-24 earnings and yield a reliable 6.8 per cent.
Advice Buy
Why A bet on Olley and economic recovery
