The Investment Column: BAe flourishes all alone

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The Independent Online
The tantalising prospect of a merger between the two monoliths of the domestic defence industry, British Aerospace and GEC, may ultimately be what investors have in their gun sights but for now BAe is doing just fine on its own.

Shorn of Rover and with its commercial aircraft division responding slowly to treatment, BAe is somewhere close to firing on all cylinders.

The turboprop aircraft market may still be in the doldrums, even after the demise of Fokker took out a slug of unwanted capacity. But the military market is recovering strongly from the Cold War blues while Airbus, once the whipping boy of BAe, is probably turning in annual profits for the group in the region of between pounds 80m and pounds 100m.

The 38 per cent jump in pre-tax, pre-exceptional profits for the half- year to 30 June is testimony to the recovery in BAe's civil aircraft markets and the pre-election spending spree that Michael Portillo, the Secretary of State for Defence, has enthusiastically embarked on.

The strengthening, meanwhile, in the balance sheet, with some pounds 511m in net cash sloshing around at the half-year mark, is largely the result of the windfall from the flotation of Orange, in which BAe retains a 22 per cent stake.

But the contribution of the management team, led by Sir Dick Evans, chief executive, and Richard Lapthorne, finance director, cannot be over-estimated. Cost controls have been improved, working capital squeezed and the nettle finally grasped of BAe's yawning lease recourse exposure in commercial aircraft.

What of the future? The official line is that George Simpson, himself an ex-BAe man, will be too busy getting to grips with GEC to spare time for merger talks in the next 12 months. But the deeper BAe gets into the prime contractor role of defence systems integration the more obvious become the overlaps and the synergies with GEC. In the meantime it has the rest of Europe to go for. The merger of BAe's missiles business with those of the French group Matra is the shape of things to come. While BAe may have its own grand design for European defence integration, it may have to be opportunist in what else it bolts on. The shares, up another 37p to 1,049.5p, have performed heroics but with talk of a break-up value of pounds 14 they may still have some way to go. Profits of pounds 450m this year and pounds 550m next put the shares on a forward multiple of 15, falling to 12. Still worth a shot.

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