Will BAE Systems (LON: BA.) Fortune Change with the £4.8 Billion German Eurofighter Deal?

Summary

  • BAE has reportedly won a contract worth £4.8 billion to build Eurofighter jets for Germany
  • The company is expected to launch Tempest, a new fighter jet programme, which could lead to benefits of up to £25 billion.
  • The FTSE 100 listed company managed to declare an interim dividend of 9.4p per share payable in November

UK’s leading aerospace & defence company, BAE Systems Plc (LON: BA.) stands tall amid the unprecedented challenges prevailing in the trading environment. The company is expecting high demand along with high order intake for its capabilities in line with the pre COVID planning for the year.

The FTSE 100 listed company, specialising in defence systems, has reportedly won a contract worth £4.8 billion to build Eurofighter jets for Germany. The German parliament has approved the purchase of 38 Typhoon aircrafts and the defence company is looking forward to completing these deals in a timely and efficient manner.

For the Eurofighter Typhoon contract, BAE Systems shall commence work from next year onwards at its sites in Lancashire with most of its high-value engineering activities being carried out in the North of England. Nearly 5,000 employees are engaged in the Typhoon programme in the UK.

The aerospace defence systems are responsible for 87 per cent of the nation’s defence exports and contribute nearly £6 billion of revenue to the UK each year. The Typhoon programme incentivises defence companies to innovate and develop next generation combat systems.

The company seems to be well poised to achieve strong and profitable top line growth with increasing cash conversion in the coming years, given its large order backlog and incumbent programme positions. The company is on track to achieve its full-year sales guidance for 2020 as announced in its interim results. Good operational performance and an expected lower tax rate is likely to help the company in offsetting the negative foreign exchange impact and lead to slightly higher underlying earnings per share than previously guided. Notably, the company’s order backlog stood at £46.1 billion during the first half of 2020.

US Navy Contract

 

The UK-based Aerospace manufacturer had also announced recently that it had won a new $94 million five-year digital engineering contract to provide advanced technology to the US Navy and expects to achieve strong and profitable top-line growth in the approaching years. The United States has been a strong market for the company.

In the recent months, BAE has received several contracts from the US defence sector for providing underwater mine neutralisers along with helicopter-controlled drones for the US defence forces. In the UK, BAE has won a £317 million contract in September, under which the company would provide the Royal Air Force's (RAF) Eurofighter Typhoons with advanced radar systems.

In addition, BAE systems has been investing in upgradation of its Typhoon fighter jet programme. The defence company is expected to launch Tempest, which could lead to benefits of up to £25 billion.

Covid-19 impact

 

In June, the company warned the investors that the profits in the second half could dip by as much as 15 per cent. However, the company seems to have witnessed a minimal impact of the pandemic. According to a recent trading update, BAE Systems recorded a pre-tax profit of £1.8 billion and indicated that the company is on track to achieve a top line of £20 billion for the full year 2020.

Despite the catastrophe induced by the coronavirus crisis, the company managed to declare an interim dividend of 9.4 pence per share payable in November. Except for Maritime, which got affected due to Covid-19 pandemic, the top-line of the company has witnessed significant growth across its business verticals.

Also read: How well these two LSE players are performing after releasing their trading update: BAE Systems & J D Wetherspoon?

The company is, however, expected to witness weak performance in its commercial business as the aviation sector is in bad shape, though it could perform strongly in its defence business as it witnesses increased volumes of F-35, Combat Vehicles, along with development in the electronic defence systems.

Sector experts earlier had expressed that the governments across the globe would cut spending as most of the nations were on the brink of sliding into recession, however, what has transpired is completely opposite. Most of the governments across the globe are expected to increase their defence budgets in the near term.

The British government is committed to spend 2 per cent of its GDP (gross domestic product) on defence systems every year. Also, the defence budget of the United States is pegged around $740 billion for 2021. The Australian government intended to upgrade its defence capabilities and has increased its 10-year investment to AU$270 billion from AU$195 billion.

On 13 November around 11:47 AM GMT, the shares of BAE Systems were trading at a price of GBX 470.60 per share, which were marginally lower by 0.09 per cent from the last closing price of the previous day. BAE Systems’ market capitalisation was hovering around £ 15,155.37 billion. BAE shares have fallen nearly 18 per cent in the year to date time scale.

The governments may cut down on their defence spending in the wake of the prolonged Covid-19 crisis. However, with global pharmaceutical giants nearing the discovery of the potential vaccine could turn the tables for the company in the times to come.

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