BAE First-Half Earnings Rise 6.1% on Jets, Cyber-Security

  • CEO says major customers ‘continute to prioritize’ defense
  • Company doesn’t see near-term effect from U.K.’s EU exit vote

BAE Systems Plc’s first-half earnings rose 6.1 percent as its main customers expanded military budgets and the manufacturer delivered more training combat jets and cyber security systems.

Underlying earnings before interest, taxes and amortization increased to 849 million pounds ($1.12 billion), or 17.4 pence a share, from 800 million pounds, or 17.1 pence, a year earlier, London-based BAE said Thursday in a statement. That compares with the 851.5 million-pound average of four analyst estimates compiled by Bloomberg. The company reiterated a forecast that full-year underlying earnings per share, which exclude some one-time items and financial costs, will rise 5 percent to 10 percent.

The maker of Astute submarines and Eurofighter warplanes is gaining new orders as mounting tensions between its main government clients in NATO and China and Russia prompt a reversal of military-budget cuts that followed the 2008 global recession. BAE is also boosting existing export programs, including to India, Turkey and Persian Gulf states, and building up revenue from outside the defense area through acquisitions in recent years to bolster its cyber-security business.

The earnings “look solid,” though they only “contain limited encouragement as to near-term growth,” Sandy Morris, an analyst at Jefferies International analyst, wrote in a report to investors.

BAE rose as much as 1.5 percent and was up 0.8 percent to 544 pence as of 9:49 a.m. in London. The stock has gained 8.9 percent this year, valuing the manufacturer at 17.3 billion pounds.

New CEO

The company is in the midst of a leadership transition, with Charles Woodburn, who was appointed chief operating officer in February, slated eventually to succeed Chief Executive Officer Ian King in the top post. Woodburn is still visiting BAE’s businesses to get to grips with its workings, and no date has been set for the succession, King told reporters on a conference call. The board will determine whether King keeps his seat after he steps down, the CEO said.

The U.K. defense firm will eventually get an earnings boost from the approval last week of the Trident submarine order by parliament under new Prime Minister Theresa May, who took her post following Britain’s referendum in June to exit the European Union. BAE said preparations for the model are accelerating.

While BAE has warned that a breakup of the U.K. in the fallout from the so-called Brexit would threaten its Scottish shipyards, the Trident submarine project will be shielded from disruption because the vessels are built in England, King said. BAE would need to assess the future of the facilities near Edinburgh and Glasgow, which will build the U.K.’s new Type 26 warship, in the event Scotland’s independence movement gains traction, he said.

An order that the company’s Italian partner in Eurofighter, Leonardo-Finmeccanica SpA, signed in April to supply 28 of the jets to Kuwait will provide 1 billion pounds worth of work for BAE, it said. Deliveries of the model, which BAE markets as the Typhoon, continued to the U.K. and Saudi Arabia, while the first five Hawk trainer aircraft for Saudi Arabia under a 2012 contract were handed over in the first half, BAE said.

The company’s share of its net pension deficit widened by 1.6 billion pounds from December 2015 to 6.1 billion pounds, affected by lower interest rates in the U.K. and the U.S. At the next U.K. triennial funding review, starting in April 2017, BAE will look at “various options with a focus on the longer-term view,” it said.

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