Saab’s interim results demonstrated strong progression towards its full-year targets although earnings were slightly below market expectations. The company continues to invest heavily in its major platforms for future growth and while order intake levels in the first half were more back to normal, future backlog development is expected. The overall positive momentum for global defence and security spending should support this ambition. Backlog execution with improved mix and modest efficiency improvements should support the targets of 5% organic growth and a move towards a 10% margin in the coming years.
Organic sales growth of 23% and a 66% rise in operating profit, with margins expanding 120bp to 4.4% in H116, suggest Saab is well on course to achieve FY16 guidance. Management reiterated expectations for at least 5% organic sales growth with a similar operating margin to the 7% achieved in FY15. This was despite an increase in expensed R&D relating to the T-X development programme with Boeing. The backlog decline was modest in the first half, with order intake improved by around 10% excluding Kockums’ SEK8.6bn A26 submarine order booked in H115. The cash performance was also strong, aided by strong customer milestone receipts and advances with net debt falling to SEK405m at the half year.
Management continues to focus on investment in new opportunities and platforms. Five programmes are key to Saab’s growth: the T-X trainer aircraft programmes for the US; the Gripen E fighter upgrade that was rolled out in May; the export sale to Brazil; the A26 submarines; and the GlobalEye AEW (Airborne Early Warning) aircraft that has now signed a second customer. While these are either in the early stage of supply contracts or in continuing development stages (T-X in particular) the drag on margins remains significant. However, as contracts mature on the existing backlog, margins should improve assuming solid execution. If global defence procurement budgets do indeed step up from next year, then Saab is well positioned to benefit and possibly extend its record backlog further.
As Saab is now starting to deliver on its expectation of a resumption of growth, the shares have been performing well, rising to an all-time high ahead of the results. If it continues to drive earnings and cash returns ahead of its peers through successful execution of the plan then the premium rating should be sustained.