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BAE Systems throwing off cash at a prodigious rate

Free cash flow is healthy despite the group topping up the pension pot by £1bn recently

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BAE Systems PLC (LSE:BA.) said it remains confident it can hit full-year targets after what it described as a “strong first-half performance”.

Revenue rose to £9.33bn in the six months to the end of June from £9.18bn the year before. On a constant currency (CC) basis, sales were up 6% year-on-year.

Full-year guidance issued earlier this year was provided on the basis of an exchange rate of US$1.35 whereas in the first half of 2021 the average exchange rate was US$1.39. Despite the strengthening of sterling, the group still expects full-year sales will be between 3% and 5% higher than 2020’s level, although probably at the lower end of the guidance range if sterling’s strength is maintained.

Underlying earnings before interest and tax (EBIT) improved to £1.03bn from £849mln the previous year while profit before tax climbed to £1.15bn from £689mln.

The defence group continues to expect to report full-year underlying EBIT that will be 6-8% higher than 2020 while earnings per share are tipped to be 3-5% higher, even if sterling remains strong against the dollar.

The group also expects to deliver more than £1bn of free cash flow, which might explain why the company has announced a share buyback programme in which it will repurchase up to £500mln of shares over the next year.

The interim dividend has been bumped up by 5% from last year’s 9.4p to 9.9p.

"We are well-positioned for sustained growth in the coming years and are ramping up our investments in advanced technologies to deliver capabilities for our customers in the face of an evolving threat environment,” said Charles Woodburn, the chief executive of BAE Systems.

Analyst commentary

“BAE is rewarding shareholders for sticking out the uncertainty that came with operating through a pandemic with a 5% dividend hike and £500m buyback programme. The group fared better than most, maintaining its dividend and keeping debt in check, but the crisis dented demand for some of its commercial products which ultimately hit cash flow,” said Laura Hoy, an equity analyst at Hargreaves Lansdown.

“It seems the group is well on the road to recovery, though, with free cash back in the black and impressive profit growth of 27%, excluding the impact of currency headwinds. While BAE is primarily a defence play, the uptick in air travel will help the group build upon its strength—its commercial flight control business continued to suffer under the weight of travel restrictions and will offer a welcome tailwind as it things return to normal.

“With worries about a recession and cuts to defence spending budgets firmly off the table for now, we’re expecting BAE to continue gaining momentum and delivering shareholder returns in both the medium and long-term,”she said.

Neil Shah, the director of research at Edison Group, the research group, said BAE reported “stellar half-year results”.

“In its electronic systems market, demand for controls and avionics solutions and power and propulsions solutions started to recover from the impacts of Covid-19 and the firm delivered over 900 F-35 electronic warfare systems as at the end of the first half. Similarly, its Air market, including the Qatar Typhoon and Hawk programmes, continues to progress well with agreements also reached to base Qatari Hawk aircraft at RAF Leeming. In Maritime, the firm cited contracts worth more than 1bn received under the UK Ministry of Defence’s Future Maritime Support Programme, and similar successes were cited in Cyber Intelligence, with the firm’s US based Intelligence & Security business continuing to drive its bid pipeline,” Shah said.

“Overall, it’s clear that the firm delivered outstanding performance in the first half, and has positioned itself well for future growth. Equally, the firm looks set to ramp up investments into advanced technologies to deliver capabilities for its customers in an ever-changing environment,” he added.

Shares in BAE were up 2.8% at 576.4p.

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Quick facts: BAE Systems PLC


Price: 560.2 GBX

Market Cap: £17.96 billion

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