Orders rise at defence giant, in line with global tensions

With global tensions rising, defence giant, BAE Systems, has reported a £10bn uplift in orders booked since it announced its half year results in August.

In a trading update today, the group, which operates factories in Warton and Salmesbury, near Preston, building military aircraft, and a submarine building facility in Barrow, said group guidance has been confirmed, in line with the half-year upgrade, when it forecast an increase annual sales of +5 to 7% (2022: £23.256bn), a +6 to 8% increase in underlying earnings before tax, interest and depreciation (2022: £2.479bn), and free cash flow of more than £1.8bn (2022: £1.950bn).

The group employs around 15,000 staff in Lancashire and Cumbria. In December last year the defence giant launched a drive to recruit 2,600 apprentices and graduates across the business.

The order intake includes more than £30bn booked year to date. Notable awards in the second half of the year so far have been:

• £3.9bn of funding for the next phase of SSN-AUKUS submarine programme
• $797m to begin AMPV full rate production, which includes prior funding for early order materials
• c.$800m under multiple awards for Bradley fighting vehicles and upgrades
• c.$500m award for ARCHER artillery systems from Sweden

BAE said its global footprint and diverse product portfolio are key competitive advantages. The high order flow reflects continued customer confidence in its ability to deliver important capabilities at a time of heightening geopolitical risk.

As previously highlighted, most major defence programmes are long cycle in the build and subsequent support phases. As a result, contracts secured now will be executed over many years providing the group with long term visibility over top line growth.

The £3.9bn next generation SSN-AUKUS submarine award is a prime example of the long cycle nature of customer commitments.

The funding for this vitally important submarine programme provides for development work out to 2028. This phase includes the detailed design of the submarine and long-lead procurement for the build phase over the coming decades.

The award also paves the way for significant infrastructure expansion at the Barrow site, together with investment in critical skills and the supply chain to support the wider submarine enterprise.

Investment plans going forward include:

• Plans advanced for expanding UK submarines facilities
• Progressing on a new ship building facility in Glasgow
• New investment in munitions manufacturing capacity
• Increased its UK apprentice intake in the Air and Maritime Sectors
• Approximately six per cent net increase in employees in the nine months to September 30, 2023
• Progressing on Global Combat Air Programme industrial collaboration discussions
• Increased self-funded R&D year-on-year
• A robust and growing network of suppliers and industry partners to complement BAE’s Hägglunds and Bofors supply chain and production capacity across multiple product lines

Chief executive, Charles Woodburn, said: “Trading has been in line with the upgraded guidance we issued at the time of our 2023 half year results. We are delivering another year of good sales and earnings growth, together with strong cash flow generation.

“Order flow on new and existing programmes, renewals on incumbent positions and progress with our opportunity pipeline remains strong.

“These underpin our confidence and visibility for good top line growth in the coming years, and we continue to reinforce our value compounding model with a sharp focus on operational performance and disciplined capital allocation.”

The group said it will announce its preliminary results for the year ending December 31, 2023 on February 21, 2024.

Russ Mould, investment director at Manchester investment platform, AJ Bell, said: “Greater geopolitical instability continues to drive orders for defence outfit BAE Systems, whose shares are up more than 80% since the Russian invasion of Ukraine in February 2022.

“With the emergence of a new conflict in Gaza, global governments are facing ever greater pressure to invest in their defence capabilities at a level which they probably haven’t faced since the end of the Cold War. New initiatives like the joint Aukus submarine project, on which BAE has a meaningful position, are reflective of this situation.

“The encouraging thing for BAE and its shareholders is that the contracts it is winning tend to be long term in nature and, as a result, the company has good visibility on revenue, earnings and cash flow over several years.”

He added: “The muted share price response to today’s trading update may reflect some disappointment at a lack of further upgrades after the company’s boost to guidance at the half year stage in August.

“The acquisition of space-focused Ball Aerospace remains on track for completion in the first half of 2024 – which reflects on management given the regulatory hurdles involved including deals in this space.

“There was no further news on capital returns – BAE has already acknowledged buybacks will slow given it has completed a large part of the £1.5bn programme slated to run until the end of the first half of 2025.”