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The call is at 9.30AM UK time Overall performance approximately inline – within that EBIT and pretax beat but EPS constrained by higher tax and share count than expected Those factors extend to the full year guidance, with sales growth and margin both raised by 100bp, but tax and a higher than expected share count result in unchanged EPS growth guidance (see second table) – note though that guidance is at $1.28, our forecast are at $1.295, and spot is currently $1.336 – as almost half the business is in the US, that c4c delta could cost ≈1.5% of sales and earnings – similarly free cashflow guidance is unchanged, both for 2025, and for subsequent years The good news obviously lies in the strong operating performance, particularly from Platforms and Services (P&S – mostly armoured vehicles), and the raised underlying guidance, but it is not unalloyed Book to bill was less than 1.0, which should not be entirely surprising given the increase in basis, and it doesn’t have to mean the book to bill will be less than 1.0 for the FY, as the outcome depends on unknowables, mainly the timing of large orders, most obviously Typhoons for Turkey The higher tax rate partly reflects French corporate windfall taxes on MBDA, and the risk of further surtaxes for defence, and even wider government intervention in a suddenly strategically vital sector, casts a shadow on the upside story for European defence The growth in P&S is probably not sustainable at current rates, as the extremely strong Swedish businesses are encountering basis effects and capacity issues, which are likely to limit their (nevertheless still high) growth rate, whereas changing administration priorities in the US are likely to bring some decline to US armor In aggregate though, BAE Systems should be able to sustain upper single digit top line growth for a while, perhaps moderating to the upper end of mid-single digits as European and UK segments growth rates slacken off at a high level, while parts of the US stall or decline a little This reminds us that BAE is not a pure European defence play, even though its share price has recently behaved as if it is – it had c48% of revenues in the US in 1H25 and that market is not growing in real terms (eg total capital outlays), though BAE may be able to modestly beat that average Hence the fact that BAE has moved so far past our targets is a matter of concern to us, even if those would probably rise a little with the passage of time were we to revise them now (but only a little, as we upgraded at the end of March)
BAE Systems plc
Interim summary H1 sales increased 11% in the period, with all sectors contributing growth. Organic growth was 9%. Underlying EBIT was up 13%, increasing H1 return on sales to 10.6%. Underlying EPS increased 12% to 34.7p (2% ahead of consensus). Free cash outflow of £368m is inclusive of movements on customer advances and is in line with expectations (consensus £376m outflow). Order intake of £13.2bn remained high across all sectors and the period closed with an order backlog of £75.4bn. Outlook: Sales and profit growth guidance increased by 100bps, to 8-10% and to 9-11%, respectively… …due to strong H1 and momentum; management have increased confidence in the rate and duration of future growth. EPS and FCF (>£1.1bn) guidance reiterated. Slightly higher tax plus buyback programme removing fewer shares than originally anticipated due to the higher price mean EPS is still expected to grow between 8 and 10%. Guidance is on a constant currency basis (sensitivity is consistent; a 5-cent movement impacts underlying EPS by c.1.4p). European and US opportunities abound (e.g. Turkey Typhoons, US FMS, Germany, US Golden Dome). Valuation / view: The shares are on a FactSet consensus CY25 P/E of 24.4x, falling to 22.1x next year with a FCF yield of 3.4%. The Group looks well set for long term growth; recent company visits reaffirmed this. The backlog of £75bn and pipeline of c£180bn (the combined represents >8x annual sales), gives excellent visibility and duration of growth.
BAE reports 1H25 results on Wednesday 30th July, with a call at 9.30AM UK time Not expecting any surprises after “steady as she goes” AGM statement and CMD at UK Air, both in May, though US results last week brought volatility in either direction There have been some external developments since May: Upside issue – Potentially imminent Turkish order for 40 Typhoons, following UK-Turkish security agreement Another order for 12 additional Typhoons for Qatar is expected And the long awaited Saudi order for ≈50 Typhoons may move forward now that advanced AESA radar and cockpit upgrades are available – Saudi has two groups of older aircraft to replace (Tornados and F-15C) so even if US releases F-35 for sale to Saudi, Typhoon could still take one of the opportunities Downside risk – Despite the apparent increase in the FY26 US defense budget, in reality this is spread over several years and results in a similar skyline to the FY25 plan, which gave roughly zero real procurement outlay growth through the rest of the decade – but the new administration is sharply changing priorities and cancelling or cutting back on some established programs, including BAE’s M-109A7 self-propelled gun, and it is reducing offtake of F-35, on which BAE has a substantial unit value The administration has indicated that next year’s budget will be equally large (eg c$1trn), but details are lacking, and the budget already expands the deficit in outer years, and this time next year the midterm elections will be close, and more voter friendly spending may be prioritised – we doubt that the FY27 defense budget will match the headline number of FY26 It may be difficult for BAE to maintain the pattern of running a book to bill of well over 1.0 in 2025, as the basis has risen
BAE held a Capital Markets Day on 13 May at the company’s Warton site.The focus was on the Air Systems division, which accounted in FY2024 for £8.5bn/30% of the company’s revenues, and £1,007m/33% of operating profits.Air Systems is the division with BAE’s highest exposure both to Europe (through combat aircraft joint venture programmes, most notably Eurofighter and GCAP, and MBDA) and direct exports and long-term support, especially of Eurofighter.Management were very reluctant to be drawn on the possibilities of specific new Eurofighter orders, let alone assign any sort of probabilities to specific timings or quantities of aircraft – though they acknowledged that the current build rate of 12-14 a year could double.Our analysis suggests additional orders for Eurofighter could total c.280 aircraft to 2035e, above those currently on order for other European partners. But, weighted for realistic probabilities of orders being won/placed in the next c.2-3 years, this equates to c.135-140 aircraft, with BAE’s potential share as lead contractor being around two thirds.Firm orders alone should see Eurofighter deliveries increase by two thirds to 2028e, to around 20 aircraft annually. But additional exports, even heavily handicapped for probability/timing, could more than double this rate again, potentially to c.40pa from 2029e-on, considerably more than indicated by BAE management.This suggests to us that Eurofighter could be the driver of Air Systems’ revenue and profits growth for at least the remainder of the decade, a continued build-up from GCAP development work notwithstanding.A consistent refrain throughout the CMD was a desire of BAE’s customers (and potential customers) for industrial and operational sovereignty in ownership and operation of advanced defence equipment.GCAP appears to be seen (albeit tacitly by management) as restoring this to its partner countries (UK, Italy, Japan) after the F-35 programme, which is subject to persistent and intensifying concern about the degree of control the US has over the use of the aircraft by allies. GCAP appears to us to remain on track for a mid-2030s entry into service, but we recognise that this involves continued risks in terms of funding and technologies.GCAP, along with FalconWorks, BAE’s unmanned and emerging technologies business, total c.10% of Air revenues that did not exist in 2019, at the time of the last CMD at Warton. FalconWorks has also become a focal point for small bolt-on acquisitions of technology, especially in manufacturing, training and unmanned systems.We would stress that incremental revenues from higher Typhoon production may already be partly reflected in our valuations, as we allow for 13% more sales by 2030 in our valuations than are currently in our forecasts – this reflects assumed revenues resulting from higher UK and European defence budgets that are not yet sufficiently specific to be included in our bottom-up forecasts.
FY guidance maintained Trading so far this year is in line with management's expectations. Full year guidance is maintained, with good growth in revenue and EBIT as well as solid cash generation; underlying EPS +8% to +10% (2024: 68.5p) and FCF in 2025 of >£1.1bn. This is using a cable rate of 1.28 for the year; a 5 cent movement impacts sales by c.£525m, underlying EBIT by c.£75m and underlying EPS by c.1.4p (INVe FY25e is 74.9p). The current spot rate is 1.34 (so, -2% impact if this rate prevails). The order backlog and pipeline of work on incumbent positions provide good visibility and support long-term growth. The regions in which BAE operate are poised for higher spending and provide a robust set of further opportunities. Notable YTD orders include $356m for AMPV, $300m for ARCHER & TRIDON Mk2, $360m for ACV, $800m for ISC services (Intel & Security) to the US Air Force and c£600m for various MBDA domestic and export awards. Self-funded R&D is focused on electronic warfare, autonomy, laser-guided weapons, uncrewed air systems, synthetic training, electrification applications and space solutions. Buyback: As at 6 May, BAE had completed £392m of the 3-year, up to £1.5bn, buyback programme, which commenced last July. Valuation: A CY25E P/E of 23.6x (vs. EU peer average of 31.8x and US peer average of 16.7x via FactSet), EV/EBITDA of 13.6x and FCF yield of 3.1%. Next catalyst(s): Air Sector site visit next week, UK Strategic Defence Review by end June, H1 results on 30 July.
BAE’s 25-years of acquisition driven US growth has served it well, but time is up for that strategy – we argue that BAE should spin off its US businesses by issuing separate shares for its US assets and for its other (UK, Europe and rest of world) businessesWe believe the already poor growth outlook for US defense budgets will deteriorate further, as cost cutting and strategy changes take effect and have a particular impact on key BAE programs such as F-35 and tracked armorThis should not create the organisational challenges that such a change would normally create, as BAE is already required to operate its US assets as a self-contained entity, with US management and limited access for non-US BAE managersThese US exposures are diluting the growth prospects of the group, leading to a much poorer share price performance than its European peers, and exposing BAE to US political risk – spinning off those assets would largely cauterize that riskBut US defense stocks still trade on high multiples and the spin should realise full value for the assets – that window may not be open for long thoughWe are not arguing that BAE is undervalued as it stands, but splitting the company would allow investors to choose their preferred geographic exposureIn this report we also update and extend forecasts through 2032 and move our price targeting basis on to 2030In addition, we add a pro-forma slice of earnings from growth in UK and European defence budgets to 3% of GDP by 2030 and incorporate that scenario into our price targetsThis brings much less of an uplift than a similar exercise for Rheinmetall or Leonardo, but it adds 13% to pro forma sales by 2030This results in new price targets of 1370p up from 1335p at 1-year and 1690p up from 1555p at 3 years – that still leaves BAE in Hold territory though
BAE Systems^ (BA., Hold at 1,256p) - Strong and stable growth
US Department of Defense and civilian space budgets are going to be cutWe know this because the key figures in the administration have said soSo far, the proposed cut for DoD is 8% but that may just be a startMajor BAE exposures such as US Army modernisation (eg armor) and manned fighters (eg F-35) are explicitly in the firing line, as priorities shift to the Pacific and to new technologiesThe proposed Senate Defense budget increase is probably academic nowDefense has to be cut so the administration can pay for an extension to the 2017 tax cuts, which otherwise expire at the end of 2025, ahead of the 2026 mid-term electionsThe administration has effectively ring-fenced around three quarters of government spending (Social Security, Medicare, VA etc.) and Defense is half of what is left – it is the biggest lever the administration can pull Almost half of BAE’s revenues come from the US government, predominantly from DoD, but also NASA and NOAAIts US armor accounts for around 50% of its Platforms and Services revenuesF-35 provides 14% of Air revenues and a significant portion of US ElectronicsWe are not cutting those forecasts yet though, as we do not have enough data, but it seems highly likely we will have to – there may be some mitigation from other growth areas, and some protection from multiyear contracts, but an 8% budget cut is likely to be inescapableOur forecast and targets rise, but the share price is close to our new 1-year target and the risk to US revenues renders the 3-year target moot, hence we believe it is prudent, after a very strong run (we upgraded to Buy in December 2017 at 556p), to downgrade to Hold
Sales and profits in lineGuidance in line on sales and just below our forecast on profitsVery strong free cashflow of £2.5bn vs consensus £1.5bn due to late in year advances for CV90 and MBDABut guiding much lower than usual free cashflow for 2025 (£1.1bn)But did this in 2024 so actual outcome really depends on Q4 advances againAnd 2023-25 and 2024-26 3-year total guidance both raised (see table later)Net debt only £200m better than we expected as more went out on acquisitions and buybacks than we had accountedBook to bill was just under 1.2x – better than expected at beginning of year but in line with last trading statement. Was 1.5 and 1.7x in last two years as basis effect kicks inDividend higher than expected at 33pAir was stand out profit performance in 2H24 with 12.4% marginHQ charges and intra-group sales adjustment impact on sales and profits was bigger than before and more than we expectedNot found any mention so far of geopolitical or US budget developments – likely to remain an unaddressed elephant for the momentStill upside to our three-year target but well above our 1-year and exposure to US budget risk
FY24 beat BAE has delivered FY adj. EPS of 68.5p (3% ahead of INVe 66.3p and consensus 66.8p) representing 8% growth, but it is FCF of £2.5bn that is materially better. FCF is almost £900m above consensus due to increased customer advances late in the year (e.g. MBDA, CV90) and good cash management. Sales +14% constant currency (+c.9% organic growth) driven by Maritime (+12%) and P&S (+15%). ROS +10.6% (5bps improvement) driven by portfolio mix – significant growth in Maritime at lower group dilutive margins (7.7%). Outlook Order intake of £33.7bn drives new record backlog of £78bn. This represents just a portion of the embedded value from incumbent positions. FY25 is set to show another strong year of growth with upside potential as seen as the start of a long cycle. Guidance for FY25 is for 8-10% EPS growth on 7-9% sales growth. We forecast FY25E adj. EPS of 74.9p (vs. consensus of 75.8p). There is no short cycle Ukraine dependence in the guidance. We do not expect consensus earnings to change much today. The 3-year FCF target has been upgraded by £0.5bn for 2024-2026 (now >£5.5bn) and by £1bn for 2023-2025 (now >£ 6bn) reflecting the strong cash position. Valuation The shares trade on a CY25E P/E of 17.8x, EV/EBITDA of 10.5x, FCF yield of 4.2% and dividend yield of 2.5%. The strength of BAE’s diverse portfolio, backlog and ongoing uptick in performance is showing through at a time when the world has become more dangerous and European defence budgets are being focused on war-fighting readiness and deterrence following a long period of underinvestment.
BAE Systems^ (BA., Hold at 1,337p) - In line FY results and modest guidance
BAE put out a ‘steady as she goes’ autumn trading update, following a small guidance upgrade at the half year stage, so the actual results should not bring any big surprisesOrder intake was good at the time of the trading statement, with 1.2x book to bill through October, following 1.5x and 1.7x in the previous two full yearsIf the numbers themselves turn out to be relatively low key, other factors in the defence market environment are much noisier and demanding of attentionBAE’s share price has dropped back over the last few months (notwithstanding the very recent pop), having got well ahead of our target track, and is now somewhat above our 1 year target but well below our 3-year target, both of which would rise were we to rerun our targeting exercise today (to 1335p and 1555p respectively) without any change to forecasts, giving the stock upside for both time points
• Guidance unchanged, but is at $1.24o Actual average cable year to date is circa $1.29 which takes about 2% off the guidance shown in our table (eg on translation of US revenues and earnings which are about half of group total) putting our forecast roughly inline• Order intake year to date £25bn which annualises at over £33bn, or book to bill of around 1.2xo That implies £10bn of orders in 3Q24, compared to £15bn in 1H24, without having booked any jumbo orders (eg a large Typhoon order for example)o This implies good overall order momentum, helped by strong order intake at MBDA (€2.5bn, eg £2.1bn of the £10bn in Q3) which is running a very high book to bill• Employee headcount is up by c7.5% to October, an annualised growth rate of c9%, which substantiates an expectation of continuing strong growth• The statement indicates total returns to shareholders of c£1.4bn in 2024 – if we assume just over £900m of cash out on dividends that implies c£500m of buybacks, slightly higher than our £400m assumption and implying a slightly lower average share count run rate from 2025 onwards• Ball acquisition said to be going well towards a medium term annual 10% growth rate target (already factored into our forecasts)• No mention of the recent serious fire in the submarine assembly hall at Barrow in Furness which seem like a missed opportunity to reassure• Overall, no surprises, and there is some marginal scope to upgrade our forecasts as they stand, but we await some substantial Eurofighter orders (Turkey, Saudi) which should permit a meaningful multiyear upgrade – we avoid putting speculative orders into our forecasts even if the likelihood is high• Recent run in European defence stocks has taken the share price up to close to our 3-year target and well past our 1-year target (see chart), so there is some risk that the share price performance could pause for a while, particularly if Trump administration appointments cast doubt over already anaemic US defense budget growth
BAE Systems^ (BA., Hold at 1,394p) - In-line trading update, but orders look light
Performing well The business continues to perform well; guidance across all metrics is unchanged from upgraded guidance at H1 in August. Explicit guidance: Sales +12-14% from £25,284m, Adj EBIT +12-14% from £2,268m, Adj EPS +7-9% and 2024 FCF >£1.5bn. Order intake is c.£25bn year-to-date with another six weeks to go in the year. Notable contract awards in H2 so far include: M109 Self-Propelled Howitzers and M992A3 Ammunition Carriers - $493m, Guided weapon components - A$270m to boost production in Australia and Order intake of around €2.5bn from the Group's share of MBDA joint venture. The Group is positioned well for continued growth in the years ahead. The balance sheet remains strong. Up to £1.5bn SBB programme announced in August 2023, commenced on 25th July 2024 and c£1.4bn expected cash returned to shareholders this year (SBB and 2023 final dividend). Valuation: Shares are on a CY24E P/E of 21.1x falling to 18.6x next year, and CY24E EV/EBITDA of 12.5x, falling to 10.9x next year. More EU defence funding: The FT today carries an exclusive story on the EU’s plans to change its spending policies to potentially redirect tens of billions of euros to defence and security. It highlights Brussels’ intention to free up money from its cohesion funds, money that is aimed at reducing economic inequality among EU countries. These funds currently comprise a third of the bloc’s common budget, or €392bn from 2021 to 2027. Only about 5% of these funds have been spent to date, with the biggest beneficiaries spending even less. But under existing rules, they cannot be used to purchase defence equipment or directly finance the military. Member states will be told in coming weeks that they will now have more flexibility under the rules to redirect cohesion funds to support their defence industries and military mobility projects.
BAE Systems is due to publish its trading statement tomorrow morning Tuesday 12th NovemberBAE does not publish quarterly numbers, but occasionally gives some selected year to date data in its statementBAE upgraded guidance at the half year (by 1-2% depending on the metric), which makes it less likely it will do so again tomorrow, but far from impossibleOur forecasts are a little low, given the upgrade, but we already upgraded in June, so we have been waiting for some bigger news (eg Eurofighter orders for example) to put in a multiyear upgrade, rather than a 2024 tweakMajor current topics which could figure tomorrow include:New Typhoon orders – Germany and Italy have decided to order more aircraft (20 and 24 respectively) though these may not have been formalised yet, and Spain finalised an order for a further 25 last week – these orders are all led by the home nations concerned but BAE picks up a share of the aerostructures workPotential Typhoon orders – Likely new orders for export, any of which could be imminent, include 40 for Turkey, 50 for Saudi (agreed some years ago but held up by German export license issues), and 24 more for Qatar – these would all be BAE Systems’ prime contracts, with BAE booking 100% of revenues and receiving customer advance cashGeneral order activity – the group book to bill was 1.7 in 2022, 1.5 in 2023, and above 1.0 in 1H24, and we expect it to remain above 1.0 for the full year – this is still only marginally benefiting from orders resulting from the Russian invasion of Ukrraine in 2022 – we expect more to come from this, but it takes time, particularly given the lead time on BAE’s mostly medium to long-cycle product areasFire at Barrow in Furness submarine assembly hall – This was clearly a significant event and appeared to be a very serious fire, so it would be helpful to know whether it will have any consequences for the Dreadnought ballistic missile submarine programme schedule, which is already very tight – we believe the nature of the contracts protects BAE from incremental cost, but that does not necessarily mean there will be no financial effectsElection of Trump administration – BAE has about 50% of its sales in the US, most of which go to the DoD, so it more geared to US defense budget growth than most European stocks, and the current US 5-year plan is for static to down real terms capital spending growthWe do not yet know what the new administration intends to do, but an isolationist, America First government would tend to be negative for defense spendingThe 50% that is not US is growing very rapidly though, and BAE’s US armoured vehicles and ammunition business offers some good export prospectsThe recent run up in the share price has it pushing our 3-year targets and well past our 1-year but, prima facie, our forecast needs upgrading for the increased guidance, if only by a percent or two, and there is the potential for more in the outer years, as the Typhoon orders are booked and baked into the forecasts
BAE Systems^ (BA., Hold at 1,285p) - Immaterial upgrades post results
Call is at 9AMBeat across the board – not so spectacularly as RR, but still a beatOrders ahead of sales so book to bill>1.0 again and backlog rose to £59.6bnUpgraded sales growth by 2%, Profits and EPS growth by 1%, free cashflow by ≈15% and 3 year cumulative free cashflow by 9%Takes guidance above our forecastsNot upgraded 2023-26 free cashflow forecast thoughNotably good performance from US platforms (US & Swedish armour, US ship repair) on sales and margins, but all other segments beat modestly tooMargin attributed to Hagglunds in Sweden and move to full rate AMPV production in the USGood solid results and guidance – less dramatic than RR as this is a long cycle business that is not coming off a low baseAnticipated upgrade momentum continues and likely to remain primary share price driver for some years in very strong demand environment
H1 results summary BAE reports interim H1 sales (+11%), EBIT (+11%), and EPS (+6%) all slightly above (2-3%) consensus expectations. All sectors are growing well, with P&S and Maritime leading the way organically (+10% organic). Electronic Systems sales grew 34% as this includes 4 months of Space and Mission Systems contribution. The supply chain is clearly being well managed. A record Order Backlog of £74bn (vs. £66bn at H1’23) continues to provide great visibility. £15.1bn of orders in H1 (Book to Bill >1.1x), with the largest order being Hunter Class Frigates in Australia at £4.6bn. Shareholder returns The interim dividend increased 8% to 12.4p. The follow-on £1.5bn buyback programme commenced immediately after completion of the prior £1.5bn, 3-year programme was completed in 2 years. FY guidance upgraded for all key metrics EPS growth increases to +7-9% from +6-8% on FY23A EPS of 63.2p and FCF of >£1.5bn from >£1.3bn. Valuation / our view On our prior existing estimates, the shares are on a CY24E P/E of 19.4x falling to 17.1x next year, and CY24E EV/EBITDA of 11.5x, falling to 10.1x next year. The Group looks well set for long-term growth; recent company visits and meetings in Barrow-in-Furness (see note) and Farnborough reaffirmed this. Buy and 1500p TP reiterated.
1H24 PreviewBAE is a long-cycle business so half-year results should not tell us much that is new, but things that will be watched are :Book to bill – order intake and prospective new orders – normally 2H biased and facing tough comparatives – will do well to be above 1.0 in the first halfCashflow – normally negative in first half, as advances are consumed and then positive in 2H, as governments pay, and orders tend to get signed, at the end of the year – but strong profitability and lack of historical pension outflows should keep free cashflow positive in 1H24Seasonal sales and profit split – normally slightly 2H weighted due to milestone recognition on large contracts – typically 46-47% H1Very differing US/UK/Australia/Europe/RoW environments – US slow budget growth, even if BAE is well placed relatively, UK committing to very large, very long term air and maritime programmes, Australia similar, Europe focused on rapid near to medium term rearmament, especially in land systems, and BAE has European exposure via Sweden and MBDA (and indirectly via US electronics and its Eurofighter and F-35 participations), RoW good prospects for follow on Typhoon orders in Saudi and QatarSmaller issues – Ball acquisition done in 1H24 – how is it settling in? Cyber looking a bit left out in wider defence boomCapital deployment – Started new £1.5bn 3 year buyback, despite spending £4.4bn on Ball in 1H24 – is this the best use of capital?Supply chain challenges – very long term growth in UK and Australia buys time to recruit and train people, but rapid European growth more challenging for Sweden and MBDA – which are probably both capacity constrained.BAE is above our 1-year target, but well below our 3-year target and we expect forecasts to continue to trend upwards, further helping the valuation – we retain our Buy recommendation
Visit summary We visited BAES’ manufacturing site for the UK’s most formidable weapons platforms yesterday. The Dreadnought and Astute nuclear submarines are built in Barrow-in-Furness, where the immensity of the site and boats themselves is confronting. The complex is the largest of its kind in Europe. The Submarines business accounted for £2.6bn in revenue last year (10% of Group) with 11,900 employees (growing to 17,000 when at scale). As a reminder, Dreadnought is the replacement programme for the Vanguard Class, which form the UK's continuous at sea nuclear deterrent. The first boat is expected to enter service in the early 2030s. The cost of the programme is stated at £31bn with a £10bn contingency. The Astute class equips the Royal Navy with its largest and most powerful fleet of attack submarines. Five have already been built; we saw HMS Agamemnon and HMS Agincourt in construction. These cost almost £2bn each. We note Cohort (Buy, TP 850p) supplies its external communications equipment and releases FY results next Wednesday, 17 July Key takeaways The work is mainly cost-plus, protected against inflation, and demand stretches out to 2050 (as SSN-AUKUS follows). Focus is on cadence given the life of Vanguard and SSN-A in the pipe. Among others, we met the highly experienced MD Steve Timms and FD Simon Wood, who emphasised the improvement in the commercial position. Prior programmes were hindered by a world unsure of the need and focussed on cost; the market environment today is very different. Valuation The shares trade on a CY25E P/E of c.17x, EV/EBIT of c.12.5x and DPS yield of c.2.6%. Next event: H1 results on 1 August.
BAE Systems plc Cohort plc
BAE Systems^ (BA., Hold at 1,382p) - In line trading update
The PM announced yesterday a funded plan to increase defence spending to 2.5% of GDP by the end of the decade, reaching £87bn a year in 2030. Defence is to receive an additional £75bn over six years, ensuring the UK remains by far the second largest defence spender in NATO after the US. Additional funding will be used to put the UK’s defence industry on a war footing (including an additional £10bn over the next decade on munitions production), deliver cutting-edge technology and back Ukraine against Russia (an extra £500m this year for ammunition, air defence and drones). The plan moves from an aspiration to spend 2.5% by an unspecified date. Defence spending will increase immediately and rise linearly. Key beneficiaries include Chemring which generated 43% of FY23 revenue in the UK (FY25E EV/EBITDA of 10.1x), Cohort that generated 54% of FY23 revenue in the UK (FY25E EV/EBITDA of 10.3x) and BAE Systems, for which the UK was 26% of FY23 revenue. Other European NATO countries are under increasing pressure to increase spending. If all NATO countries committed at least 2.5% of their GDP to defence, the collective budget would increase by more than £140bn. While we favour the product firms for operational gearing, defence service stocks should also benefit; we note the UK represented 66% of QinetiQ (N/R) H1 sales and 61% of Babcock’s (N/R) sales last year. Meanwhile, the US Senate passed a $95bn foreign aid bill in a 79-18 vote, putting an end to a political stalemate in Congress over funding for Ukraine that also held up funding for Israel and Taiwan. Senators rushed to approve the supplemental funding legislation after it was approved by the House last Saturday. The $95 billion supplemental includes: $60.8bn in Ukraine-related funds, including: $13.4bn to replenish US stockpiles, $13.9bn for the procurement of technology, $13.7bn to buy additional materiel for Ukraine, $7.3bn for US operations in Europe and $26bn on oversight of Ukraine aid, plus $26bn in assistance for Israel and Gaza and $8bn for various Indo-Pacific security needs.
BA/ CHG CHRT
BAE Systems^ (BA., Hold from Buy at 1,242p) - Strong results, but not spectacular
Solid set of numbers, debate on the cash outlook BAE released a solid set of 2023 numbers, overall meeting PandL expectations (underlying EBIT in line with consensus, with a beat in Maritime and a miss in PandS). Other points of note include strong order momentum (book to bill slowing after an exceptional H1, but still at a strong 1.27 in H2) and a nice underlying FCF beat (c.GBP0.3bn, excluding WC timing effect that will reverse in 2024). While overall execution as per the 2024 guidance seems good (1% EBIT beat to consensus on 2024 organic guidance), there are a few modest points of debate, with slightly less contribution expected from Ball Aerospace in year 1, underpinning a small miss of the consensus EPS vs guidance, and a 3-year FCF outlook marked by significant consumption of customer advances. The relative weakness of FCF in our view was the main driver of the share pullback on the day. Earnings and valuation fine-tuned While the divisional outlook provided by the company looks very close to our expectations, we have added a few months of consolidation of Ball Aerospace (10 months in 2024 instead of 6 initially expected) and deconsolidated a 34% stake in Air Astana (IPO underway). We have also modelled another tranche of share buybacks in 2024 and reduced our net interest expense forecast as per the company''s guidance. This explains our EPS increase while our EBIT forecast are almost unchanged. The lifting of our fair value from 1,128p to 1,180p mostly reflects a reduction in the time discount of our SOTP (still 2025-based) and modest EBIT revisions. Nothing to complain about on BAE, but we still prefer more targeted defence exposure While the geopolitical environment remains complex, and in spite of the US election campaign weighing on defence spending debates much earlier than we thought, we continue to prefer to play defence through targeted exposure from smaller players, the benefit of large, diversified players (resilience) also limiting...
Strong momentum The business is performing strongly – over the last 3 years, it has delivered 20% sales growth, orderbook growth of 50%, margin expansion of 80 bps, delivered over 100% cash conversion and returned £4.2bn to shareholders. BAE has delivered FY adj EPS of 63.2p representing 14% growth and slightly (1%) above consensus. Sales was 2% above consensus. Sales growth was led by Maritime which grew 22%. RoS was flat as very high maritime sales at regulated profit rates diluted RoS. FCF is the standout at £2.6bn - £0.8bn or 41% above consensus due to increased advances & good cash management. The underlying is probably c.£0.3bn better from good performance and new orders. Moreover, order intake is even higher than last year - a record £38bn – the Backlog is now £69.8bn (up £10.9bn). Strategic progress has been strong with AUKUS, GCAP and the Ball Aerospace acquisition (c70% space exposure). Dividend up 11% - final dividend 18.5p (30p in total for year). Outlook FY24 is set to be a strong year of growth, but is seen as just the start of a long cycle. FY24 EPS growth of 6-8% on sales growth of 10-12% – higher tax charge 21% vs 19%, Air Astana 1% dilutive, Ball Aerospace looks likely to be accretive from FY25 onwards - £500m of buybacks modelled. FCF in excess of £1.3bn FY24 guidance includes the 10/12ths impact of Ball Aerospace and Air Astana partial disposal (proceeds NOT in the FCF guide) Valuation Valuation (pre Ball): CY24E EV/EBITDA 10.9x and DY 2.3%. The strength of its global and diverse portfolio, backlog and on-going uptick in overall performance will be of note to more international investors. Buy, TP placed under review (from 1200p).
BAE Systems^ (BA., Buy at 1,253p) - Robust FY23A results -
Strong order intake Trading has been in line with the upgraded guidance issued at H1. This represents another year of good earnings growth, together with strong cash flow generation. The key highlight is that strong order intake continues with c.£10bn booked since half-year – bringing YTD to >£30bn. This excludes the recent MBDA Poland announcement that is likely booked in Q1 next year (£4b UK-Poland agreement with MBDA; BAE own 37.5%). Notable contract awards include the £3.9b funding for the next phase of the AUKUS submarine programme, $797m to begin AMPV full rate production, and $800m under multiple awards for Bradley fighting vehicles and upgrades. The opportunity pipeline remains strong, and the update reinforces the long-term growth outlook. With a sharp focus on operational performance and disciplined capital allocation, performance is good, while the share buyback is ongoing (a further £1.5b was announced at H1). The Ball Aerospace acquisition clearance is tracking along as expected. Valuation (pre Ball): CY24E EV/EBITDA 10.0x, P/E 16.7x, FCF Yield 5.3%, DY 2.7%. Investec conference The CFO and IR are presenting at our conference today. Next catalyst: Preliminary results in February 2024.
BAE Systems^ (BA., Buy at 1,104p) - In line FY23F trading update
BAE Systems^ (BA., Buy at 961p) - Ball brings enhanced relevance & growth
BAE Systems (BA., Buy at 1,003p) - Ball Aerospace acquisition
BAE systems published strong H1 23 results with sales up 13.6%, EBIT up 13.1% and EPS up 20.9% yoy, all above market consensus. The company has upgraded its FY23 guidance and, given the strong order intake (especially in Air and Maritime) and FCF generation moving in the right direction, BAE System’s long-term outlook looks bright and worthy of investor attention.
Orders, sales, EBIT and cash all well ahead of expectations H1 results beat consensus by 7% on sales and EBIT. Orders came in at GBP21bn vs GBP18bn expected. Versus our forecast, the beat was spread throughout the group, with in particular an 11% sales beat in Maritime (9% above at the EBIT level), reflecting accelerated spend profile on the Dreadnought program, and 30bps margin beat in US Platforms and Services (EBIT 8% above our forecast) from the strength of the European armoured vehicle Hagglunds, Ship Repair and munitions businesses. Air also beat our EBIT by 7%, from both 5% better sales and 20bps higher margin. FCF beat massively consensus forecast, exceeding estimates by GBP741m, driven by receipts of customer advances on new contracts, mainly in Air. Guidance increased on Dreadnought boost and overall strong trading momentum Group organic sales growth guidance was lifted by 200bps (5-7% growth now expected assuming USD/GBP at 1.24), partly due to faster sales recognition on the Dreadnought submarine program. Underlying EBIT growth was revised 200bps as well (to 6-8%), with a stronger impact at EPS level: 500bps increase, compounded by a reduction in Underlying Finance cost (GBP220m, improved by GBP40m) and tax rate guidance this year (19% guided this year vs 21% previously). The 2023-25 FCF guidance was massively increased from ''above GBP1.2bn'' to ''above GBP1.8bn'', and the 2023-25 FCF outlook lifted by GBP0.5bn (to GBP4.5-5.5bn), implying that the FCF upgrade is sustainable. This confidence in future cash flows underpins the launch of a new buyback program of GBP1.5bn. Surprising top-line momentum, but still not enough to turn buyers Despite being materially exposed to slower growth in the sustainment and support defence businesses, BAE continues to surprise positively on its ability to generate strong sustainable top-line development. This is reflected in our earnings update, which underpins our fair value uplift from 997p to...
BAE Systems^ (BA., Buy at 933p) - Model update following H1 results
BAE Systems (BA., Buy at 933p) - Strong H1 results with upgrades to come
H1 expectations materially beaten BAE delivered interim orders, sales, EBIT, EPS & FCF all up and above consensus expectations. The order backlog increased to £66bn with £21bn of orders in H1 (vs. £18bn in H1 22). This continues to enhance visibility. Sales increased by 11% at constant currency to £12.0bn (consensus £11.2bn). Adj EBIT £1.23bn (+7% vs cons); Adj EPS 29.6p (+12.5% vs cons). FCF £1.07bn vs. consensus of £741m. H1 dividend increased by 11% and a further £1.5bn buyback over 3 years, to start after completion of current programme. All sectors growing well and Dreadnought funding acceleration the major growth driver for Maritime. FCF driven by receipt of advances on contract awards mainly in Air. Upgraded guidance Sales growth guidance is increased by 200bps from 5% to 7%, reflecting the accelerated spend profile on the Dreadnought programme, good demand and operational performance across all sectors. Underlying EPS guidance range is increased by 500bps from 5% - 7% to 10% - 12%, reflecting higher profit, higher interest income and a reduction in the expected tax rate to 19%. In-year free cash guidance increased by £600m to >£1.8bn. Valuation On existing estimates, a CY24E EV/EBITDA of 8.8x is a 30% discount to US peers.
Insightful site visit: The well-attended CMD in Sweden focussed our attention on the Platforms & Services division (17% of FY22 revenue) and Hagglünds / Bofors within it. The Swedish business appears to be a gem, set to grow output threefold over the next three years. Presenters chimed on a key market change; customers now want long-term supply contracts, have funds and are impatient. The combat vehicle and weapons product portfolio is well aligned to US and international customer priorities. As such, the opportunity pipeline is significant. Order book momentum: The backlog as at 31 Dec was £59bn. Subsequent wins include the CV90 Czech Republic order of $2.2bn and the BvS10 framework agreement of $760m. Significant work on the AMPV, ACV and M109 will last for the rest of the decade, and a high level of Foreign Military Sales is expected on AMPV and ACV towards the end of the decade. Moreover, Ukraine-related restocking is expected to flow through. While missing out on the OMFV result (not in estimates), BAE did not initially bid and suspected it to be aggressively priced. In Air, (F35, Typhoon and Tempest) progress continues. Estimate upgrades: We increase our FY23E and FY24E adj. EPS (FD) estimates by 3.5% and 6.3% to 59.6p and 63.4p, incorporating latest organic growth guidance, FX, and the latest share buybacks. We also introduce FY25E. Re-rating deserved: We upgrade our TP to 1200p from 1015p, rolling forward to a target CY24E EV/EBITDA of 11x (still a 10% discount to US peers) and FCF yield of 5%. We think a sustained re-rating closer to, or arguably above, US peers is deserved (last seen in 2008) given order momentum / preferential geographic exposure, operational improvement, and balance sheet headroom. Next catalyst(s): H1 results on 2nd Aug, DSEI Show on 12th-15th Sept.
Civil Demand: Everyone with whom we spoke was upbeat on demand, while frustrated by supply chain constraints. The trade press are expecting a strong week for orders; c.3,000 compared to the combined backlog of Airbus and Boeing of c.12,000. Airbus landed a record order from IndiGo for 500 aircraft and Flynas ordering 30 narrowbody aircraft. News sources also flagged Airbus in negotiation with Viva Aerobus for 100+ narrowbody aircraft. In the past week, both Airbus and Boeing have raised demand forecasts for new commercial aircraft over the next 20 years. MTU Aero Engines (N/R): Raised guidance for its earnings forecasts to more than €800m, representing a y-o-y increase in margin compared to previous guidance of stable margins (12.3% in FY22). Revenue guidance remains unchanged at between €6.1bn to €6.3bn. Civil Supply: Long supply chains continue to experience constraints that are holding back deliveries. On the ground, senior management are all focused on meeting underperforming suppliers and encouraging them to ramp up deliveries. There is a dearth of engineering talent. This is likely to persist even after material shortages have dissipated. Defence: The Defence industry made a more prominent showing compared to prior years. The static display of loitering munitions and UAVs was understandably larger, with budgets increasing across the European continent and the threat environment moving rapidly. This resonates with our well attended visit to BAE System’s (BA.L, BUY, 1015p TP) site in Ornskoldvik last week, where output is ramping up threefold over the next three years. A clear message was how customers now want more and longer-term supply agreements, providing improved sales visibility. This is also consistent with the message from Chemring (CHG.L, BUY, 430p TP) at H1 results two weeks ago.
BA/ CHG CHRT MRO PRV
BAE systems published strong FY22 results with sales up 9%, EBIT up 12% and EPS up 16% yoy, all above market consensus. Order intake, which was mainly based on programmes announced prior to the outbreak of the Russia-Ukraine war, stood at a record level of £37bn, up by 70%. FCF stood at £1.95bn, outperforming the consensus by £700m, of which £500m was due to payment timing but the rest mainly due to better cash management.
FY22 beat consensus BAE has delivered a strong set of results across the headline numbers, with YoY growth in sales, EBITA and FCF. EPS of 55.5p is in line with our number but +3% vs. consensus on revenue of £23.3bn (1% ahead of consensus), and EBITA of £2,479m (1% ahead of consensus). The dividend is up 7.6% and the pension is still in a surplus, net debt is now at £2bn. Highlights Free cash flow is a highlight at £1.95bn vs INVe: £1.27m (+54%) and consensus of £1.25m (55% beat). Order intake a record £37bn, up over 70%. The backlog is now £59bn vs £53bn at H1. Upgrades to FCF with the three-year target for 2023-25 set at £4.5bn, a £0.5bn upgrade to each year. Outlook FY23 guidance unchanged: Sales growth 3-5%, EBIT growth 4-6%, further margin expansion (programme performance, mix, efficiency programmes), EPS growth 5-7%. The business is performing well. 2023 is set to be a good year of growth but management sees this as just the start. Valuation On a CY23E P/E of 15.7x, the shares trade on a c15% discount relative to US Defence Primes and a c25% discount on an EV/EBITDA multiple of 9x. The strength of its global and diverse portfolio, backlog and on-going uptick in overall operational performance will be of note to more international investors. Buy.
Summary of estimate upgrades: We increase FY22E/23E/24E sales by 4%/5%/5% (FX adjustment plus outer year optimism) that, combined with share buybacks, drives our adj. (FD) EPS estimates up by 12%/7%/12%. We upgrade FCF by 15%/8%/12% with the cash drag from the pension eliminated. Re-rating deserved: Appropriate steps have been taken to justify a re-rating closer to US peers; (1) operational improvements are expanding margins and cash generation, (2) pension requirements are no longer an issue, and (3) preferential geographic exposure to rising defence budgets. Supportive backdrop: NATO membership and European budget commitments are expanding. Poland recently announced intent to increase spend from 2% to 4% of GDP in 2023. The €1.2bn acquisition of munitions business Expal Systems by Rheinmetall at c.3x sales signals bullish European intent. Moreover, we see upside potential in Australia, where BAE is among the largest defence contractors; the AUKUS security alliance encompasses submarines, cyber enhancements, AI, hypersonic technology and EW. On this, we expect announcements soon. Tensions with China have risen with surveillance balloons recently shot down and US warnings about aiding Russia. The partnership in Japan also positions BAE to benefit from spend doubling as a % of GDP within 5 years in maritime and air system upgrades. Sensible capital commandment: The second tranche of the share buyback commenced in November, taking advantage of the discount. Estimated dividends and remaining share buybacks over 3 years totals 12% of current market cap. The dividend is well covered by earnings and FCF. The balance sheet remains deployable for bolt-on acquisitions. Valuation discount: On a CY23E P/E basis, the shares trade on a 15% discount relative to US Defence Primes and a 25% discount on an EV/EBITDA multiple (see page 2). We update our TP to 1015p from 680p. BUY.
A very strong year of order intake The trading update shows BAE is tracking towards a very strong year of order intake. A further £10bn of orders have been secured since the half year (£18bn was secured in H1), notably in Maritime with orders of £4.2bn for the Type 26. The order book is predominantly long cycle, and with incumbent positions on key programmes gives BAE multi-year visibility. Short cycle exposure will benefit from a recent uptick in US outlays, having been falling from elevated levels. Key milestones in programme execution since the half year include the delivery of the first four Typhoons to Qatar. FY guidance maintained with upside from FX and buyback The FY guidance is maintained on a constant currency basis, but FX (1.38 assumed in Feb) and the buyback programme provides upside pressure on consensus. BAE is successfully navigating the challenging environment, with programme execution remaining strong across all sectors. The outlook remains encouraging with a diverse portfolio mix supported by robust markets. Overall, this gives line of sight for future growth and margin expansion. Strong balance sheet The balance sheet supports capital allocation flexibility which includes the share buyback programme, dividend policy and opportunities for bolt-on acquisitions. On the share buyback programme, >30% of the 3 year £1.5bn plan is complete. The pension position is robust, scheme liquidity is good and accounting surplus is likely to have increased. To support future growth, there has been an increase in investment for R&D, people, and facilities. CEO & CFO presenting today, at our Best Ideas Conference BAE is trading at a 30% discount to US peers on a forward P/E basis despite a better ROIC. We expect the gap to close not least for preferential geographic exposure, improved pension position and ongoing share buyback.
Strong H1 results Summary: Interim profit is ahead of expectations, the order backlog has increased to £52.7bn and 3 year Buyback of up to £1.5bn announced – c.7% of current market cap. Sales increased 3% at constant currency, to £10.6bn (Cons £10.5bn); Adj EBIT £1,112m (+ 3.6% vs Cons); Adj (FD) EPS 24.5p (+ 5.6% vs Cons); FCF was in line at £123m. Interim dividend increased 5%. Pension triennial review completed – scheme fully funded on a technical provisions basis, a positive outcome. Leviathan order backlog H1 order intake +70% to £18bn. The order backlog is now £53bn vs. £44bn at 31 Dec. Major orders received in period were for Dreadnought; KSA Support; Spain Typhoon; MBDA awards; M109, ACV; Hawk Support. HY orders are largely from incumbent positions. Defence spending up cycle presents future opportunities. H2 orders are expected to be strong also, given the expanded opportunity pipeline. Significant progress has been made on the CV90 for Slovakia, Czech Republic and BvS10 orders in last few months. Guidance confirmed. FX is a tailwind Underlying FY guidance is confirmed and expected to be significantly bolstered by FX (last provided at cable rate of $1.38). Supply chain, labour availability and inflation present challenges but are being actively managed. New Chair announced - Cressida Hogg – to be Chair designate from November and take over from Sir Roger Carr after the AGM in May 2023. Valuation CY22 FCF yield 5.6% rising to 6.2% next year, DPS yield 3.5% and P/E 15.6x (ex FX tailwind if spot rate persists) falling to 15.0x. Our TP is under review.
BAE has published decent Q4 21 results, with impressive cash generation. It is well set to expand through its diverse Defence portfolio. Its FCF guidance has been particularly better than consensus. The guidance does not include the impact of the war in Russia, which will benefit the British company.
BAE has provided a market update to confirm its objectives for FY21 and its cash goals for the next three years. Overall, the business remains strong, with potential growth opportunities linked to the new Auckus alliance.
Guidance re-confirmed In what should be seen as a reassuring update, BAE re-confirm FY guidance with expected top line growth, margin expansion and cash generation underpinned by continued good operational performance. Critically, supply chain pressures have been effectively mitigated thus far, resulting in no material impact, which stands out given wider sector performance. Guidance summary: 5-7% sales growth at constant currency, underlying EBIT +10% at constant currency, underlying EPS +3-5%, 2021 FCF >£1bn. As such, we would not expect any material changes to FY21 consensus as a result of today’s update. Supportive outlook The Group’s order backlog and position on key programmes continue to support the growth outlook over the medium term. We would highlight the CEO’s comments: "Demand for our capabilities remains high and we have a strong pipeline of opportunities across our broad geographic portfolio that will enable our skilled, global workforce to deliver capabilities which will support our customers in responding to the evolving threat environment." Management taking action The current buy-back is c60% complete, at c£300m – as we have previously written, the improving free cash generation suggests more returns to shareholders may come. In line with the strategy to increase R&D investment and seek bolt-on technology M&A, the Group acquired In-Space Missions in September, a UK-based satellite manufacturer, increasing exposure to space. Best Ideas Conference Management are presenting at our Best Ideas Conference next week, Monday 15th – please contact us to register.
1H’21 recap: Interims highlighted momentum in orders (intake +13% YoY) and execution (margins +c160bps on adj. EBIT basis), with cash generation an ongoing highlight, at £461m (FCF, vs INVe £58m / cons. £71m outflow). Sales increased 2% (+6% at constant currency), to £10.04bn (in line with cons/INVe); Adj. EBIT £1,028m (+8% / +5% vs cons/INVe); Adj. (FD) EPS 21.9p (+10%/ +7% vs cons/INVe); Interim dividend increased 5% to 9.9p. A share buyback (SBB) was announced, of £500m, or c3% of the market cap. Outlook: Trading guidance is unchanged despite an FX headwind. US DoD modernisation outlays remain supportive of near-term trading, at +6% ttm in June. The medium-term outlook is also turning more positive, with Senate Democrats supporting the Administration’s FY22 budget request and proposing 2% YoY increases out to 2026. Some would also prefer more. Estimates: We leave trading assumptions unchanged, noting a 53% H2 bias (adj EBIT basis), in line with FY19A. FY21E FCF increases due to disposals in the first half. Our FY21/22E adjusted diluted EPS increase by 1%/3% respectively reflecting the estimated impact of the SBB. Our view: We increase our TP to 680p (prev:600p), driven by the lower net accounting deficit of £2.4bn (down 46% mainly on discount rate moves) which we reflect in our SoTP valuation (post-tax). At 33% of net assets, the net pension deficit (pre-tax) is at its lowest level since 2007, when BAE’s discount to a US peer group was between 0-10%, vs the current discount of c30%. In our view, further re-rating of the shares may be driven by discount convergence, de-leveraging or further buy-backs driven by strong cash generation and sentiment inflection on defence stocks generally. A FCF yield of 8% and DPS yield of 4.5% remain attractive; BUY, TP 680p (prev: 600p). Next Event: DSEI 14-17 September (Let us know if you would like to join us).
A good set of results with a nice CF beat BAE results beat H2 expectations by 3% on sales and 7% on EBITA. We especially note strong sales on Cyber and Maritime and a large margin beat in the Air division. Demand was also strong, with a book to bill at 1.06 in H2. There was also a strong beat on FCF (c.GBP500m better than consensus). The FY20 FCF of GBP1.4bn (before a GBP1bn one-off UK pension contribution) beat guidance by GBP0.6bn thanks to GBP0.4bn of early customer receipts (German Typhoon, CV90 Switzerland and F-35) which will unwind in 2021, GBP0.1bn of profit improvement and GBP0.1bn of other working capital improvements. Solid cash outlook for 2021 and after BAE''s outlook (which includes greater disclosures than in the past) is based on an FX rate of 1.35 on GBP/USD, vs spot at 1.39. Apart from that, the outlook is in line with expectations. We note that the FCF is guided above GBP1bn (vs consensus at GBP1.1bn) despite the accelerated receipts of 2020, which reflects strong underlying cash conversion of earnings. BAE has also updated its 3-year cash outlook to ''above GBP4bn of FCF'' in total expected over 2021-23, despite the strong 2020 WC performance. Earnings and valuation fine-tuned - still a strong value play with limited momentum We have marginally increased our earnings forecasts by a low single-digit percentage, based on a 1% increase in sales forecast. Despite better cash position, our valuation is trimmed for higher IAS pension deficit. With less than 10x EV/EBITA 2022 and a strong 9% FCF yield that year (and growing), BAE still stands at the top of our Value investment list, with positive gearing to a possible inflexion in cash allocation. However, the share price remains held back by the lack of gearing to a cyclical recovery in a very momentum-driven stock market. We therefore recommend the stock to value investors looking for downside protection or eager to play a slow recovery over time. We reiterate our Outperform...
BAE released a sound set of figures for FY20, beating the consensus and shining with its strong cash generation. The company remains poised for groth in FY21 thanks to its defensive backlog and high exposure to strategic contracts.
Well positioned portfolio: One key takeaway from the major programmes and markets presentation last week was that the five-year sales outlooks are either positive or stable for key programmes that comprised almost two-thirds of 2019 Group revenue. A £46bn order backlog, incumbent positions on key programmes, opportunities on aircraft sales and support, electronic systems and land vehicles, as well as some short-cycle exposure, support the outlook. Operational improvement should now drive margins and free cash generation. Higher FY20 earnings: The recent trading update indicated that performance has remained resilient and in line with expectations for a strong second half. Guidance for FY20 sales and cashflow held firm, with earnings expected to be higher than previously guided via good operational performance and a lower expected tax rate, offsetting an adverse FX impact. US outlook: US Defence Primes have begun to re-rate from their pre-election discount of c.25% vs the start of the year. While we await FY21 budget approval, DoD outlays grew +12% YoY. BAE’s US portfolio remains well aligned to spending priorities and growth areas. Estimate changes: We reflect updated guidance and adjust for FX. As a result, FY20E adj. (FD) EPS increases by 6%, to 44.6p. FY21E/22E are unchanged at this point, as is cumulative three-year free cash flow of c.£3.5bn. Discount: BAE is trading at a c.38% discount to US Defence Primes, near the ten-year trough. A CY21E P/E of 9.5x, falling to 8.9x, appears attractive while a CY21E dividend yield of 5% and FCF yield of 7% are difficult to ignore. Best Ideas: BAE is presenting at our Best Ideas Conference today.
BAE released a trading update for the third quarter, which was fairly reassuring. Demand remained high across all major markets, fuelling the backlog. Operationally, programme ramp-ups and good execution across divisions maintained earnings, with potential for raising the EPS for 2020.
The deal: Woolworths Group is one of the largest retailers in the world, generating over £35bn in sales last year, and provides further recognition of the quality of EYE’s offering. The 5-year contract is focussed on the loyalty offering, yet we expect the deepen element of the win/transact/deepen strategy to play a key role in future growth of the account. With this contract and the Warehouse Group deal announced in 2019, EYE is building critical mass in a region which may serve as a stepping stone into Asia-Pacific in the fullness of time. Signing an enterprise level client during lockdown/COVID restrictions is a great achievement, particularly both a market leader and leader in digital. Woolworths Group is the largest retailer in Australasia with over 3,000 stores selling grocery, drinks and general merchandise to more than 29 million customers every week. Woolworths has a key focus on digitisation, having created WooliesX, a department solely focussed on digital innovation. Strong in New Zealand: Woolworths’ Countdown business is the 2nd largest supermarket in the country and, when considered in concert with EYE’s existing Warehouse Group contract (the largest non-grocer), the group is building a commanding position in NZ. Measured growth: Eagle Eye continues to invest as it wins new clients rather than before, providing more evidence that the management team is growing the business in a prudent and successful fashion. Vaccine relief: News of the successful vaccine trial is undoubtedly positive for EYE as it is likely to encourage the return to business in its food and beverage sector (a 10% revenue impact), alongside the hope that potential clients may review their digital strategies or re-start existing plans to digitise. Valuation: we increase our target FY22e EV/Sales multiple to 3.5x, reflecting the future growth that should accompany this win, alongside our view that wins of this calibre stand EYE in excellent stead to continue with its growth ambitions.
BA/ CCH EYE PFD JDW
BAE released a sound H1 set of results, beating consensus at revenue, profitability and cash generation levels. The company’s business model proved to be very resilient and displayed encouraging prospects for the remainder of the year. We maintain our Buy recommendation on the stock.
FY20 earnings modestly better, a dividend for FY19 and order backlog to >£46bn. H1 trading has delivered £895m of EBITA, a 10% YoY decline, on sales that increased by 4% on a constant currency basis to £9.9bn; in line with expectations given the pre-close update. An underlying operating margin of 9.0% (1H19 10.6%) reflects inefficiencies due to COVID-19 restrictions. FY20 earnings are now expected to be a mid-single digit percentage lower than in 2019 (we have -7%) on slightly lower tax and a 1.25 cable rate. The directors have declared an interim dividend of 13.8p per share in respect of the year ended 31 December 2019, payable in September, being the value of the dividend proposed but subsequently deferred earlier in the year. In addition, an unchanged interim dividend of 9.4p is declared. In 2020 the Group now expects free cash flow, excluding the £1bn pension payment, to be approximately £800m for the full year, close to original guidance allowing for the lower earnings (we have it at £848m). The US Radios and Military GPS acquisitions are on track. The Group’s share of the pre-tax accounting net post-employment benefits deficit increased to £6.0bn (31 December 2019 £4.5bn). The increase was mainly driven by the impact of lower discount rates which increased liabilities, partially offset by contributions paid (including the Group’s injection of £1bn into the scheme). The deficit funding programme will complete in 2021 with the final £250m payment, ahead of the next triennial valuation exercise. Encouragingly, the order backlog has increased to £46.1bn. Trading on multi-year, long-term contracts in the Air sector was offset by a 7% increase in the US business and a foreign exchange benefit. Valuation The shares are trading on a CY21E P/E of c.10x falling to c.9x, and EV/EBITDA of c.7x falling to c.6x, with a dividend yield of c.5%. Our target price is unchanged at 600p. Buy reiterated.
Slightly higher profit headwind from covid-19 than we expected BAE expects broadly flat sales in H1 2020. This is consistent with our view of small underlying growth offset by headwinds from US commercial electronics, some programs impacted by supplier issues (ACV), and moderate productivity difficulties in long cycle business (international Air programs, Maritime, MBDA). BAE expects a c.15% decrease in EBITA in H1 (we had -5%, consensus -6%). This is mostly driven by extra costs from covid-19 and productivity headwinds (no furlough of personnel in the UK) and unfavourable mix effects (pressure on high margin civil avionics business, with USD900m annual sales). We think it may also reflect accounting headwinds, due to slow progress on programs accounted at percentage-of-completion. H1 operating cash outflow (pre-pension top up and acquisitions) is expected to be similar to previous years (GBP-574m in 2019), with limited covid-19 impact. Fundamentals remain intact, and situation should quickly normalize into Q3 BAE is hopeful that the covid-19 impact will be broadly contained to Q2: actions have been taken to build resilience in operations, c.90% of workers are operational either on site or remote, and only moderate impact from supply chain ripple is expected through in Q3-Q4. Underlying organic performance seems fine, and demand and orders are holding up in line with management expectations. An update on dividend policy will be made with the H1 release (likely to confirm final 2019 dividend payment in our view). Forecasts cut on higher one-off costs and our more cautious view on commercial avionics BAE has not yet provided any FY guidance, but we suspect consensus is likely to trim expectations for slightly higher one-off costs from covid-related operating disruptions. This is reflected in our EPS and cash flow cuts. We have also taken a more cautious view on the sustainability of pressures in commercial avionics, underpinning our c.6% EPS...
BAE has issued a pre-close trading update ahead of the H1 publication in July, highlighting a positive and reassuring operational performance across all sectors despite the pandemic. Overall, the impact is mainly on the profitability side, while both top-line and cash generation have turned more resilient. Productivity accelerated through June, near normal, boding well for the expected rebound in the second half of the year.
1H20 pre-close statement - key takeaways Financial impact from COVID-19: H1 Sales are expected to be broadly flat YoY at c.£9.4bn, with H1 EBITA down c.15% YoY (1H19 £999m), with operating cash flow following a usual seasonal pattern with an outflow of c.£500m. The acquisition of the Airborne Tactical Radios business completed on 2 May and integration is reported to be going well. We continue to expect the acquisition of the Military GPS business to complete during H2 - both are in our numbers this year. Productivity levels have improved in June within the defence business; with many sites having >90% of employees working either on site or flexibly. We expect no material changes to FY20/21 consensus estimates as a result of today’s statement, with momentum building into H2, and a financial outturn expected to be at least as good as last year (2H19 Adj EPS 24p). We are slightly below consensus for FY20E with adj EPS of 43.2p. We expect an update on the dividend at the interims announcement – we expect the FY19 Final to be paid in H2. The order backlog across major programmes continues to be supportive of the medium-term outlook. Valuation appears compelling at a c.40% discount to US peers vs historical discount closer to 20%, and despite the pension funding actions taken in H1. 1H20 interims 30th July
Q2 disruption expected Trading in Q1 was not materially impacted by COVID-19, with several significant orders received from US customers, although disruption is expected in Q2, mostly in the UK business given what the company is seeing at this point. We expect this is more in terms of workforce disruption, as the Group has a large order backlog consisting mainly of Government contracts on multi-year programmes. As such, we would expect any impact on revenues to be more of a deferral, rather than lost outright. We heed caution around Engine and Flight Control products given risk to Civil Aero build rates, however this is a relatively small part of Electronic Systems and we do not see a material impact. There may also be some disruption to JV supply chains in Europe. Good liquidity, dividend deferred out of prudence We understand that undrawn facilities are c.£2bn and total liquidity is c.£4.6bn. In the interest of prudence and stakeholder goodwill, the final dividend decision has been deferred with a review on 30th July. We think there would have to be a significant deterioration in trading and cash performance for this not to ultimately be approved. As a strong signal of intent, the c.£1bn one-off extraordinary pension contribution as previously announced will go ahead. Acquisitions on track The Military GPS and Airborne Radios businesses acquisitions are on track to complete in the coming months – financing remains in place. The UTX – Raytheon merger is expected to complete today, 3rd April. Board appointment Announced yesterday, Jane Griffiths will join the Board as a Non-Executive Director. Previously held roles include various executive level positions with Johnson & Johnson. In her most recent role before retirement, Ms Griffiths was head of Actelion where she gained experience of integrating international acquisitions. Current roles include as NED of Johnson Matthey. Nick Rose agreed to extend his term as a NED for up to one further year given the current challenging period. Our view We place our forecasts and TP under review, as we are doing for all companies currently withdrawing guidance at this time, however we do not see this statement as altering our fundamental investment case.
BAE reported sound results today, roughly in line or above estimates, as well as for guidance. The company recorded operational improvements in a number of programmes, which, combined with ongoing contracts that are maturing, lead us to expect a further improvement at the cash level.
FY19A adj. EPS 50.8p (45.8p excl. one-off tax benefit vs cons. 45.3p) Revenue of £20,109m; in line with consensus (£19,825m); representing CER growth + 7%. Adj. EBITA of £2,117m; in line with cons. (£2,097m) / INVe (£2047m); adj. EBITA margin of 10.5% (INVe 10.5%). Adj. EPS of 45.8p; in line with cons. (45.3p) / INVe (45.0p) (excludes one-off tax benefit at 5p/share). Final dividend of 13.8 p/share; total 23.2p/share for the year, a 5% increase vs FY18. Net debt £743m vs INVe £919m (excl. acquisitions); aided by working capital inflows: FCF £850m vs INVe £746m. Key highlights Electronic Systems posted a strong performance, with margins the highest in some years at 15.5% (INVe 15%), highlights include c.£566m of production contracts on F-35, c.£302m of APKWS. Order cover at 70% (vs 70%). US backlog grew 12%, representing a book-to-bill of 1.12x. New pension deficit recovery plan: £1bn, one-off, debt-funded payment. Ongoing funding in line with existing commitments. Outlook: No changes expected to consensus estimates 2020 adj. EPS expected to grow mid-single digits (assuming $1.30/GBP): INVe: +3.5% to 47.3p, our unchanged estimate. The medium-term objective for FCF has been evolved: £3.5bn-3-8bn in 3 years 2020-22, with c.£1bn expected in 2020. Our view Contract wins in recent years have improved visibility and execution is improving – driving positive earnings and cash momentum – we forecast an adj. EPS CAGR 2019-23E +4% (vs 2015-18 +2%); and c.£3.9bn of FCF cumulative 2020-22E. Our forecasts currently exclude the two acquisitions announced 20 Jan that came free as a result of the Raytheon-UTC merger regulatory process – both are high-quality and build on strength in Electronic Systems to offer upside from synergies. Valuation: CY20E P/E 13.5x falling to 13x in CY21E, EV/EBITDA 8.6x falling to 8.3x; CY20E DPS yield 3.8%. Results presentation at 0900 today: webcast at investors.baesystems.com See table overleaf for divisional variance.
BAE Systems has entered into an agreement to buy Collins Aerospace’s Military Global Positioning System business (GPS) and Raytheon’s Airborne Tactical Radios business. We expect the acquisition (fully financed by additional debt) to be both EPS and cash flow accretive while maintaining a healthy balance sheet for further potential acquisitions.
Raytheon/UTC merger process presents attractive opportunities Two high-quality businesses coming to market as result of the Raytheon-UTC merger regulatory process. Both businesses to sit within Electronic Systems sector (c.32% of Group profit), where cost and revenue synergies can build. Combined consideration of $2.2bn (c.£1.7bn), funded by existing cash and new debt. On existing estimates, we have net debt/EBITDA of <0.5x in 2019E and a net cash position by next year. As a result of both acquisitions completing by c.mid-2020, resulting net debt/EBITDA of c.1x appears sensible. At first glance, we would expect adj. EBIT consensus upgrades of c.4% in the first full year. Collins Aerospace’s Military GPS business: 5.8x EV/Sales, 12x EV/EBITDA The GPS business provides military GPS receivers and has been a pioneer in military GPS markets for over 40 years. It is being acquired for $1.9bn / c.£2.5bn, representing 5.8x EV/sales and 17x EV/EBITDA on 2019E, or 12x after an expected tax benefit of c.$365m / c.£280m. ROIC > WACC expected in 3rd full year post completion. An expected revenue CAGR of 10%+ over the next four years is supported by Congressionally-mandated upgrades to existing systems, to include the next-generation M-Code signal, which improves anti-jamming and secure access of military GPS signals. Raytheon’s Airborne Tactical Radios: 2.2x EV/Sales The Radio business provides mission-critical airborne tactical radio solutions, with an installed base of >70,000 aircraft. It is being acquired for $275m / c.£212m, representing 2.2x EV/sales (2019E), with an expected tax benefit of c.$50m / £38.4m. The business appears to have good growth potential from the US DoD modernisation drive – we note that DoD modernisation account outlays grew 28% YoY in December (+18% YoY trailing 12m). Margins, earnings and cash expected to be immediately accretive and ROIC > WACC expected in 1st full year. Conference call at 9am, WEBEX access via www.investors.baesystems.com
BAE has released its Q3 trading update, bringing qualitative comments to the market. Overall, no major news nor surprises were released. The company is delivering according to expectations and the guidance for 2019 is maintained.
UK market Whilst the group is subject to uncertainties including the forthcoming general election, guidance is unchanged. The spending round announced in September re-emphasised the UK's commitment to strong defence and security, with a 2.6% real terms increase in the MoD budgets from 2019-20 to 2020-21. Manufacturing on the Type 26 programme continues to increase following cut steel on the second ship in August. US market In the US following the two-year budget agreement that was signed in July, Congress passed a Continuing Resolution for funding through 21 November. The group's US-based portfolio is well aligned to customer priorities and growth areas and the business has continued to grow its backlog. On the Paladin M109A7, the company is meeting the revised delivery plan. International In Saudi Arabia, following the updates in September from the German government regarding export licences, the group continues to work closely with industry partners and the UK government to fulfil contractual support arrangements. The ban on new exports still exists to March 2020, but the agreement to sustain existing contracts has been extended to December 2020. No material changes to consensus expected The group’s outlook for 2019 remains unchanged and continues to target >£3bn of free cash flow over the three-year period 2019-2021. Overall, underlying EPS is expected to grow by a mid-single digit percent. 2019 net debt is to be broadly unchanged from last year. Guidance is provided on current expected operational performance and an exchange rate of US$1.30. Our view Execution is improving, which should drive positive earnings and cash momentum. Contract wins in recent years have improved visibility. The discount to US peers reflects the higher political risk and exposure to Saudi (14% sales). CY19e P/E of 12.8x, falling to 12.1x. CY20e DPS yield of 4.2%, FCF yield of 6.4%.
BAE reported results roughly in line with expectations, with a slight profitability expansion. However, due to the ramp-up of a low margin programme, this performance might not be repeatable in H2. The company has maintained its FY19 guidance despite the current German ban on sales to Saudi Arabia.
Devro has reported 1H results in line with our expectations. Revenues were £119.2m (-1%) and PBT £14.9m, +4%. EPS was 7.0p and the interim dividend 2.7p (unchanged). The group had stated early in the year that it anticipated its growth to be 2H weighted and this is reflected in the slightly reduced 1H19 sales number. Edible collagen casing sales were flat (volume and price negative, but FX positive), but sales of other products (collagen gel) were lower. Regionally, EMEA and Americas reported declines in volume, but Asia was ahead with strong growth in China (+19%). EBIT also declined (due to lower volumes and price) with inflation in energy/labour costs offset by Devro 100/operating expense savings. The HoH improvement in PBT was due to lower interest costs reflecting the restructuring of RMB borrowing and a debt refinance last year. Net debt at the half-year increased marginally from the FY18 level, but there is typically a 1H outflow. By the full year, we expect to see progress in reducing leverage (to 2.0x), with this trend continuing into FY20E. We make no changes to forecasts, although we do make some minor adjustments to our profit bridge (see full report). The group now expects to deliver higher cost savings (£7m vs £6m before), but we also anticipate a negative price/mix for the FY (due to region and product mix). The latest FX rates might provide some tailwinds if maintained, but we have only included a very modest £0.5m, as rates are likely to be volatile. We continue to assume around 2% volume growth with easing comps, Fine Ultra and commercial projects assisting the stronger 2H19E.
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More molehill than mountain Sales were up 6.8%, or 4.3% on a constant currency basis. Underlying EBITA of £999m increased by 9% and implies an H2 bias of 51% vs 55% last year. Underlying earnings per share increased by 11% to 21.9p, excluding the one-off tax benefit. Operational improvements on a number of fronts (ES and Air). Focus remains on Paladin, where challenges remain. There is a £25m restructuring charge in Applied Intelligence as part of the strategic review on UK commercial cyber. HY results underpin the full-year EPS guidance, which was reconfirmed. The order backlog was down slightly as long-term support contracts in Air traded out. The US had a book to bill of 1.1x with all 3 sectors being over 1x. The KSA position is ‘being managed’. Improved net debt guidance; 3-year FCF target reiterated The HY net debt position at just under £1.9bn is better than expected. The improvement is due to timing on Qatar with slower spend to suppliers and accelerated Typhoon deliveries. The group now expects FY net debt to be broadly unchanged from year-end. We expect consensus net debt to improve from c. £1bn to c. £900m. Moreover, the 3-year cash guidance of in excess of £3bn is unchanged. Valuation – attractive CY20e FCF yield of 6.8% Our estimates are unchanged as we were already at the lower end of the net debt range. FY19E PER of 12.1x (FY20E: 11.5x) and an EV/EBIT of 9x (FY20E: 8.5x). FY19E FCF yield of 4.3% (FY20E: 6.8%) and dividend yield of 4.2% (FY20E: 4.4%). An encouraging set of H1 results with the shares trading at the attractive end of their historic 12-month forward FCF yield range, in an environment where we favour defence exposure.
Financial overview Sales were £18.4bn, flat yoy and in line with the expectations Revenues were down 2% yoy Underlying EBITA was down 2% while operating profit (IFRS measure) grew by 13% to £1.6bn, in line with expectations Operating business cash flow was down by 43% while the IFRS measure of net cash flow from operating activities was £1.2bn, down by 37% EPS came at 42.9p, in line with both expectation and guidance Order intake grew by +40% to £28.2bn Order backlog reached £48.4bn vs. £38.7bn in 2017 (IFRS restated) For FY19 BAE sees its EPS growing by a mid-single digit range compare to FY18 and expected to reach more than £3bn over the next three years
BAE Systems issued today a trading update. This comes with only qualitative comments on the advancement of its commercial programmes. As a summary, BAE’s FY18 outlook remained unchanged and the company sees its EPS in line with 2017. The company sees strong commitments in defence budgets in both the UK and the US which will support its activities in these countries. Also, BAE reminded that Brexit would only have a limited impact on its activities as there is a relatively limited UK-EU trading movement of EU nationals into and out of BAE Systems’ UK businesses. In terms of specific programmes, the F-35 one is well on track and the UK-managed Applied Intelligence business will achieve its breakeven by year-end. As for the international markets, the company remains active in the big Typhoon and Hawk contract won with Qatar which enables an extension to the Hawk programme and gives great visibility for the Typhoon over the next decade. For the latter, BAE indicated that there is still some opportunities for this programme in both partners’ countries and through exports. Negotiations are continuing with Australia and Canada in the Maritime segments. The next interim dividend of 9p will be paid on 30 November.
BAE Systems reported mixed FY result figures with slightly increasing sales thanks to all divisions except for UK Platform & Services. The EBITA margin also slightly increased to 10.4%. However, the operating profit has been strongly impacted by the impairment of some intangible assets, leading profit for the year to decrease by almost 6%. The dividend is almost flat yoy as is the order backlog.
BAE Systems reported a good looking set of H1 results, showing an improvement in revenues and EBITA margin (and the IFRS accounted operating profit margin), but also a modest increase in the order backlog versus FY16. Growth came from all divisions not only in terms of sales, but also EBITA. With increased operating cash flow in a usually-seasonally-weak half-year and higher EPS (+13.8% yoy), the group was able to increase the distributed interim dividend and has confirmed the FY guidance in an improving market environment.
BAE Systems reported quite strong FY results with growing sales, operating profit, cash flow from operations and dividend, but a stable EPS. The group remains confident for 2017 with growing margin expectations, as was the case in 2016. BAE Systems has shown resilience in 2016 in a difficult environment while sales have been supported by exchange translations.
Steve “Woz” Wozniak, infamous co-founder of Apple, was the latest culprit to send shivers across the tech world by claiming Cybersecurity is the greatest threat the world has faced since the atom bomb. Mr Wozniak was alluding to the heightened sense of fear that recent high profile breaches have caused Cybersecurity to be put at the forefront of political, corporate and now it would appear, investor agendas. As the topic gains increasing awareness, it gives rise to a number of companies claiming to be a “thought leader” in the Cybersecurity space, holding the best IP and the best routes to market. With many companies singing from the same loss making hymn sheet it is making it ever difficult to spot the true “Spartacus” from the crowd.
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h1. Financial highlights Order backlog of £36.8bn was down from £40.5bn but BAE believes that the company has reached the trough in terms of markets and the order book should start growing over the coming years, underpinning the future prospects for the business. Sales grew to £17.9bn, up £1.3bn from 2014, as UK sales benefit by £0.8bn from increased aircraft deliveries to Saudi Arabia and sales from the trading of equipment on the European Typhoon programme and the increased activity across the naval business. Foreign exchange movements added some £0.2bn to BAE’s top line. Underlying EBITA fell by £19m to £1,683m, as the reduced Typhoon production impacted revenues while BAE incurred an impairment and a rationalisation charge for its Australian shipyard. EBITA benefited from a positive £15m foreign exchange movement. Underlying EPS grew by 2.2p to 40.2p, however this includes a 2.6p benefit from an overseas tax provision release and an additional 1.7p from a UK tax provision release. BAE’s final dividends stands at 12.5p per resulting in a full-year payment of 20.9p per share, a 2% increase over 2014. h1. Group guidance For 2016, BAE expects underlying EPS to grow by 5% to 10% based on the adjusted underlying of 36.6p in 2015. HQ costs should be in line with 2015. Finance costs should increase by £35m in 2016. Based on the expected geographic sales mix the effective tax rate is expected to increase to c.22%. h1. Segmental results h2. Electronic Systems Sales for 2015 increased slightly to $4.0bn (£2.6bn) boosted by commercial sales, which now generate 23% of segment sales, with commercial revenues growing 7% in 2015. Defence revenues remained stable thanks to growing F-35 Lightning II production offsetting completed contracts. The segment maintained an RoS of 15.0% (15.4% in 2014) through strong programme execution and risk retirement. Cash conversion remained strong at 89% of underlying EBITA. Segment 2016 guidance: Low single-digit sales growth is expected in 2016 with margins around the middle of an increased 13-15% guidance range. h2. Cyber & Intelligence comprising the US Intelligence & Security sector (70% of Cyber & Intelligence sales in 2015) and Applied Intelligence Sales grew 3% to $2.8bn (£1.8bn) as the US business revenues fell by 1%, mainly due to government IT services. The Applied Intelligence segment revenues climbed by 31%, with 13% resulting from the acquisition of SilverSky and 18% from organic growth coming from non-UK government customers. Segment RoS fell to 7.8% (from 9.2% in 2014) as a result of the increased investments in the Applied Intelligence business to support high growth. Cash conversion of underlying EBITA stood at 82%. Segment 2016 guidance: Low single-digit revenue growth with flat sales in Intelligence & Security and solid double-digit growth in Applied Intelligence. Margins should stand within the 7-9% range, as the margin in Applied Intelligence recovers from high investment in product development in 2015. h2. Platforms & Services (US): Revenues fell a reported 4% to $4.2bn (£2.8bn), but by only 1% on a lfl basis as the segment registered higher than expected sales from ship repair activity and sales of munitions. Segment RoS improved to 6.4% from 4.4% in 2014. Weaker shipbuilding margins were offset by improving munitions contracts. Cash conversion stood at 56%, impacted by provision utilisation in commercial shipbuilding and on the CV90 Norway contract, in addition to the investment in a new dry dock facility in San Diego. Segment 2016 guidance: Revenues to fall by c.10% as the naval ship repair activity will be impacted by the shift of the Navy to the West coast. Margins should however continue to improve to within a 7-8% range. h2. Platforms & Services (UK) Revenues recovered to £7.4bn up 12% thanks to increased Saudi aircraft deliveries, improved trading on the European Typhoon Tranche 3 programme and the Submarines business. Segment RoS stood at 9.7% as the 2015 result includes the impact from the announced Typhoon production slowdown decision. The segment saw a cash inflow of £220m (2014 £173m) as advances outweighed consumption of customer advances on the Omani, Saudi and European Typhoon contracts. Segment 2016 guidance: Sales should fall in line with planned lower Typhoon deliveries and increasing submarine workload should offset the reducing aircraft carrier revenues. BAE suggests that margins should be at the lower end of a 10-12% range. h2. Platforms & Services (International) Revenues came in at £3.7bn, up a reported 5% or (+9% lfl) thanks to higher support activity on the Salam Typhoon aircrafts and higher weapon systems volumes. RoS of 9% (10.2% in 2014) as EBITA fell to £335m (£366m in 2014) with the segment impacted by a £53m impairment charge from its Australian business. The segment generated cash flows of £164m (down from £881m) as the second payment under the Salam Price escalation came in but was negatively impacted by early receipts in 2014 and the utilisation of customer advances on the Saudi aircraft training programme. Segment 2016 guidance: Sales growth c.5% in 2016 with increasing Typhoon aircraft support and margins at the lower end of a 10-12% range.
