BAE Purses Saudi Arabia, UAE Typhoon Combat Jet Exports

BAE Systems Plc (BA/), Europe’s largest defense company, said production of Typhoon combat jets may extend past this decade as it works to secure a follow-up order in Saudi Arabia and for 60 jets from the United Arab Emirates.

The deals could secure production, currently running out in the first quarter 2018, until 2022 at a rate of 30 planes a year, Chief Executive Officer Ian King told reporters today. Saudi Arabia may buy 48 to 72 more jets beyond 72 on order, with a bid to be submitted soon to the UAE, he said.

BAE has leaned on export markets to offset unchanged or declining spending at home. Oman last year agreed to buy 12 Typhoons to become a new customer for the jet. The gains in the Middle East contrast with a “challenging” defense environment overall, particularly given uncertain U.S. plans, BAE said today as it reported earnings that missed analyst estimates.

“We have a burgeoning set of opportunities,” King said. Winning UAE “would be a major game-changer for the company.”

Qatar and Malaysia also are considering Typhoon purchases, King said. The jet is also in competition for a South Korean order against competition from the Boeing Co. F-15 and Lockheed Martin Corp. (LMT) F-35.

BAE rose as much as 16.2 pence, or 3.6 percent, to 462.1 pence in London, and traded at 461.9 pence at 9:05 a.m. The stock has gained 37 percent so far this year.

Typhoon Pricing

Deliveries to Saudi Arabia of Typhoon jets, assembled at the company’s Warton, England site, resumed in the first six months with four planes shipped following a hiatus after the first 24 planes were handed over. BAE builds Typhoons in a joint venture with Finmeccanica SpA (FNC) and European Aeronautic, Defence & Space Co., with which the British company unsuccessfully attempted a merger last year.

King said protracted contract talks with Saudi Arabia on price changes to the existing order are progressing and should be completed before year-end.

“We’ve had confirmation no further question are required in terms of the content of our claim and the substance of our claim,” King said.

The company said today underlying earnings per share would see a double-digit advance this year, fueled by a share repurchase. The outlook is contingent on successful conclusion of negotiations with Saudi Arabia over Typhoon pricing. An agreement would add 3 pence per share to earnings, it said previously.

“Large contract wins in Saudi suggest that there is no lack of goodwill and hence a deal should be done,” Nick Cunningham, a London-based analyst at Agency Partners, said in a note.

Profit Drop

King said BAE booked 4.8 billion pounds in sales outside its two largest markets, the U.S. and U.K, during the first half. It won a 600 million pound in contracts in Saudi Arabia in the period and a 1.8 billion pound deal in June to support Typhoons in the country, BAE said.

The Pentagon yesterday said BAE Systems won a competition to support Minuteman III intercontinental ballistic missiles valued at $534.8 million.

Earnings before interest, taxes and amortization, excluding one-time items, fell 6 percent to 865 million pounds ($1.31 billion) in the first six months from 922 million pounds a year earlier, the London-based company said today. Analysts surveyed by Bloomberg had estimated profit of 998 million pounds. Sales advanced 1.3 percent to 8.5 billion pounds, also missing projections for 8.68 billion pounds.

U.S. Defense Secretary Chuck Hagel said yesterday the impact from mandatory budget cuts, known as sequestration, may force a choice between a decade-long “modernization holiday” or a smaller military. Deep personnel cuts could protect programs such as the Lockheed Martin’s F-35 fighter, the largest weapons program on which BAE is a partner.

The company on Oct. 1 will see chairman-designate Roger Carr, currently in the same role for British Gas parent Centrica Plc (CNA) join its board. Carr will next year replace Dick Olver, who has held the job since 2004.

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To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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