BAE Resumes Growth as King Cheered by U.K. Defense Pledge

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BAE Systems Plc, Europe’s biggest defense company, resumed revenue growth in the first half and said it’s more positive about levels of Western military spending.

Sales that fell in 2014 rose 11 percent to 8.5 billion pounds ($13 billion), exceeding the 7.96 billion-pound total predicted by analysts as London-based BAE reaped gains from the Eurofighter warplane and benefited from exchange rate trends.

Britain’s commitment to spending at least 2 percent of GDP on defense for the life of a new five-year parliament and a more positive outlook in the U.S. provides a boost for future order prospects, Chief Executive Officer Ian King said Thursday.

“We’ve seen further good performance and indications of a generally improving market environment,” King said on a conference call. U.K. Prime Minister David Cameron’s commitment to North Atlantic Treaty Organization spending goals provides “the most comfortable position we’ve been in in a while,” and a pending security review should deliver “visibility and stability,” he said. The U.S. has also given “recent indications of a return to growth in defense budgets.”

Shares of the armsmaker, which has sought to ride out the defense dip in its biggest markets by targeting Mideast and Asian military tenders and expanding into commercial activities, rose as much as 2.1 percent and were trading 0.7 percent higher at 472.80 pence as of 3:28 p.m. in London.

Eurofighter Output

The stock has advanced 0.3 percent this year, valuing the maker of Astute submarines and Bradley Fighting Vehicles at 15 billion pounds. Underlying earnings before interest, tax and amortization slipped to 800 million pounds in the half and adjusted earnings per share fell to 17.1 pence from 17.7 pence, though both measures were marginally ahead of analyst estimates.

Sales for 2015 will be biased toward the second half, with the group still on track to deliver revenue growth and full-year underlying earnings per share “marginally higher” than in 2014, King said.

The projections assume BAE can secure the future of a naval yard in Australia, where the government has slowed spending on ships, prompting a reduction in headcount, and that there’ll be no slowdown in Eurofighter manufacturing rates.

A decision on whether output needs to be stretched out in order to keep production going beyond 2018 will be taken by the end of the year, King said. Eurofighter is seeking a follow-on order from Saudi Arabia after a previous deal for 72 planes, and is continuing a sales push in the neighboring states of Bahrain, Qatar and Oman.

MBDA Stake

BAE will decide the future of U.S. manpower and services units with $1.7 billion in sales in the second-half following an approach to buy them, King said. “This is not a fire sale,” he said. “If we don’t create shareholder value from whatever options are there we will be holding onto the business.”

The CEO ruled out bidding for Airbus Group SE defense assets that the Toulouse-based planemaker is planning to spin off, adding that some of them had their origins with BAE.

Finmeccanica SpA’s review of its role in European missile maker MBDA could, though, lead to an offer for the Rome-based company’s 25 percent stake, he said. BAE owns 37.5 percent, the same as Airbus, and the two are consulting on how to proceed. MBDA will contribute 1.2 billion euros ($1.3 billion) in revenue this year to BAE from shipments to Egypt and Qatar.

Finmeccanica, which is also a member of the Eurofighter consortium, said separately that first half operating profit rose 45 percent to 450 million euros, beating estimates. Sales were up 5 percent at 6 billion euros, led by a 10 percent jump at its defense-electronics division. The defense-systems arm, which includes MBDA, saw revenue decline 9 percent.

Shares of the maker of AgustaWestland helicopters added 3.2 percent before trading 2 percent higher at 13.03 euros.

King, who has led BAE since 2008, said a long-term search for a successor that the U.K. company has begun is simply “good practice,” while declining to say whether the appointee must be British, as required under an existing government edict.

“There’s a huge amount to do at this organization. I’m very motivated,” he said.

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