Defence giant BAE (BA.) shares reversed early gains to trade down 1.2% to 597p despite reporting a good first half to 30 June. Its operating profits are up 10% to £865m on a year on year basis but on a less encouraging note, management say its cyber and intelligence unit needs restructuring.
BAE has been awarded lucrative contracts including an initial batch of Type 26 frigates, which is a multi-mission warship designed to support anti-submarine warfare. It’s also building the sixth Astute Class submarine for the Royal Navy worth £1.4bn. This is the latest class in nuclear-powered submarines.
The results beat Benjamin Fidler, analyst at Deutsche Bank, forecast profits and also came in 8% ahead of his earnings per share estimate at 19.8p. He maintains his buy rating with a target price of 645p, suggesting upside potential of 8%.
The FTSE 100 company, which is part of a consortium behind the Eurofighter Typhoon jet, sales are up 4% to £9.6bn on a year on year basis. These sales beat the Bloomberg consensus by 5%.
THERE ARE SOME DOUBTERS
Chief executive Charles Woodburn says that the results were ‘consistent with our expectations and guidance for the year’ which has not exactly buoyed David Perry, analyst at JP Morgan Cavenove. ‘BAE is not changing 2017 guidance because it sees a weaker than expected second half in cyber and will take a restructuring charge in that division.
‘Recall that, at the recent Paris Air Show, BAE cautioned it would not see any meaningful organic growth in 2018, although that is not mentioned in today's statement. We think a number of brokers still need to trim 2018’s earnings per share figure for lower organic growth and a worse currency exchange rate, but we are already there,’ says Perry.
STAYING ON TARGET
The restructuring of the company’s cyber division is a disappointment but it is also its smallest unit and it still enjoyed double digit growth in the first half. In a world increasingly beset by cyber security threats, this division remains an important one for BAE.
Fidler is bullish on BAE, he says ‘Despite some tailing off in Eurofighter revenues in 2018, which are already in our forecasts, growth elsewhere should allow BAE to deliver mid single digit earning per share growth out to 2020’.
Using data from Reuters, BAE trades on a forward price to earnings ratio of 13.6-times, below its peer average of 18.1-times.
