BAE Systems finals

A global defence, aerospace and security company. BAE Systems delivers a range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and support services.  I have a holding in my income portfolio (epic code: BA.)

BAE Systems released their final results today, which included the benefit of the finalisation of the Salam Typhoon agreement with Saudi Arabia announced yesterday.

Sales grew by 1% to £16,864m and underlying operating profits were up 3.4% to £1,925m; however, mainly due to impairment charges taken for the US business of £865m*, statutory operating profits were £806m - 50% below last year.

Underlying EPS was 42p an increase of 8.5%, although the statutory EPS was just 5.2p, which would have included a 6-7p improvement from the Saudi Salam agreement.   The final dividend was increased by 3.4% to 12.1p making a total dividend for the year of 20.1p an increase of 3.1%.

Orders received in the business were below last year and detailed below is the breakdown of those orders received by segment over the past three years.  Orders in this type of company will always be lumpy, but the real concern is the fall last year in order-intake for Platform & Services (US) to a level below two years ago, also the lack of growth in Cyber Intelligence in a market that is seeing double digit growth.

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The order backlog finished the year at a similar level to last year at £42.7bn.

Sales and profit by segment are detailed in the charts below.  What it obvious from this, is the lower performance from the Platform & Services (US) division, contributing 22% of sales, but just 13% of operating profits, as the division earns 6% on sales compared to a group average of over 10%.  This lower profitability, declining order intake and reduced prospects (management expect sales this year to be 20-25% lower) for the US business, is the background to the £865m impairment charge* - a result of overpaying for acquisitions in the past.   

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Free cash flow was negative for the year at -£247m compared to £1,909m last year and this resulted in the net cash of £367m at the start of the period turning in to a net debt position of £704m, after dividend and buy-back payments totaling £850m.  This level of debt is perfectly manageable, representing gearing of just under 21% and a Debt/EBITDA ratio of just 0.3.  This year will of course see the benefit of the cash receipt associated with the Salam Typhoon agreement; if the effect on EPS was 6-7p, then the net cash receipt will be between £195-227m.

Management have given guidance for 2014 and expect that EPS is likely to reduce by approximately 5% to 10% compared to 2013.  So with an expected EPS range of 37.8-39.9p and at a share price of 400.4p, BAE is rated on a prospective P/E of 10.5 with a 5% yield.  This compares to Lockheed Martin, General Dynamics and Raytheon who are all on P/Es ranging from 15-18 and with yields below 3%.

My own estimate for 2014 based on the guidance given by the company is shown below:

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BAE Systems, because of its end market, will sometimes have erratic performances, this increases the risk of holding such a share, but a yield of 5% may go some way to compensate for the additional risk.