BAE bullish on earnings as governments bolster defences

Spending commitments in UK and US set to benefit group after global conflicts boost sales

BAE Hawks, used by the Red Arrows, stage a flyover in Egypt in 2003 (AFP)

The defence giant BAE Systems has cheered up shareholders by providing a rosy outlook for next year’s earnings due to resilient future demand from US and UK defence departments.

The UK aerospace champion, led by chief executive Ian King, said 2016 earnings per share would be between 5 per cent and 10 per cent higher than last year’s adjusted rate of 36.6p, meaning earnings of 38.4p to 40.3p if the company is proved correct.

Rising support in the US and UK governments for protecting defence budgets has added to the optimism, in stark contrast to other UK industry champions such as Rolls-Royce, which is suffering due to tumbling oil prices.

BAE’s shares rose 5.7p to 505p, although they remain sluggish and are down more than 3 per cent over the year.

The feelgood factor has been boosted by President Obama, who lifted the US defence budget cap by $33bn (£23bn) this year and $23bn next year after signing the Bipartisan Budget Act last year. David Cameron also locked in the British government to spend £178bn on defence equipment and support over the next decade after publishing the long-awaited Strategic Defence and Security Review (SDSR), fuelling confidence that BAE can weather any storms ahead.

The commitments are expected to underpin continued growth for BAE and in particular its flagship Typhoon fighter jet, which Britain has committed to support and fund until 2040 as part of the security review.

“The group is well placed to continue to generate attractive returns for shareholders as defence budgets recover and... cyber and commercial electronics continue to grow,” said Mr King.

BAE reported in its full-year results for 2015 that sales were up 7.6 per cent at £17.9bn, although underlying earnings fell 1.1 per cent to £1.68bn due to one-off charges related to job cuts in the UK and Australia.

Global conflicts have benefited the group with all of its five business strands – including electronic systems, cyber and intelligence – reporting a rise in sales last year.

The most eye-catching area – the international platform and services business – was helped by the tensions in the Middle East, with Saudi Arabia taking delivery of 12 Typhoon fighter jets and ordering 22 Hawk trainer aircraft.

BAE is still hoping to bag another Saudi contract but slowed production of Typhoons.

BAE’s electronic systems business – which makes the Advanced Precision Kill Weapon System used in many jets – performed strongly with sales of £2.6bn.

Within this, sales of electronic combat products to the US – many of which are not reported to investors because they are classified due to their sensitive nature – were boosted by a contract worth up to $400m from US Special Operations Command to install electronic warfare systems on its C-130 Hercules planes.