Company Overview: The United Kingdom-based BAE Systems is a leading defence, aerospace and security company. As per the latest data available on the BAE's website, the company has employed around 85,800 people globally. Their areas of operation are categorised into segments like Air, Electronic Systems, Maritime, Platform & Services (US), Cyber and Intelligence and HQ. As per the FY18 group’s annual report, 33.23 per cent of group’s total revenue came from Air, 23.89 per cent from Electronic & Systems, 17.72 per cent from Maritime, 17.26 per cent from Platform & Services (US) and 10.52 per cent came from Cyber & Intelligence business respectively.

Vital Statistics

Management Overview
Chairman, Sir Roger Carr
Sir Roger Carr held a number of senior positions including Chairman of Centrica Plc, Vice Chairman of the BBC Trust, Chairman of Cadbury Plc and many others.

Chief Executive, Charles Woodburn
In May 2016, Charles Woodburn was appointed as COO and promoted to Chief Executive Officer on July 01, 2017.

Group Finance Director, Peter Lynas
BAE appointed Peter Lynas as Group Finance Director in April 2011.

Ownership Summary & Top Shareholders

Source: Thomson Reuters

Top Shareholders


Recent deals
On October 17, 2018,the US-based Epic Alabama Shipyard LLC acquired 100 per cent stake in the BAE Systems Southeast Shipyard which is engaged in the business of shipbuilding and repair services, from BAE Systems. On December 14, 2018, BAE Systems Australia acquired 100 per cent stake in the state-owned ASC Pty Ltd, South Australia based shipbuilding and repairing service provider.

Recent Developments
On February 21, 2019, the group announced preliminary financial results for the period ended December-31-2019. Total revenue stood at £16,821 mn against revenue of £17,224 mn during FY17, and operating profit surged to £1,605 mn as compared with the operating profit of £1,419 mn during FY17.

On January 21, 2019, Germany based Rheinmetall AG announced its intention to acquire a 55 per cent stake in the combat vehicle business of the BAE Systems Plc to form a joint venture.

Financial Performance – FY2018 (£Mn)

Source: Company filings, LSE

Revenue from operation as per IFRS reporting decreased to £16.8 bn against revenue of £17.24 bn, on account of the reduction in Typhoon production activity. Order intake surged by £8.0 bn to £28.3 bnduring FY18 as compared with the order intake of £20.2 bn during FY17. Order intake from Electronic Segment surged by 10.75% to 4.6 bn, order intake from Cyber & Intelligence segment witnessed a decline of 3.06% and stood at £1.8 bn, order intake from Platform & Services surged by 4.26% to £3.6 bn, order intake from Air segment increased by 142.2% to £14.9 bn and order intake from Maritime plunged by 24.79% to £3.5 bn respectively.

Underlying EBITA for FY18 declined by 2.3% to £1,928 mn, and after deducting a non-recurring item of £154 mn, group’s EBITA stood at £1,774 mn as compared with the EBITA of £1,961 mnduring FY17. EBITA was mainly impacted by exchange translation cost of £34mn and by a non-recurring item of £154 mn respectively.

However, operating profit for FY18 improved significantly to £1,605 mnas compared with the operating profit of £1,419 mn during FY17, on account of steep decline in the impairment costs from £384 mn in FY17 to £33 mn in FY18.
In FY18, the finance costs decreased to £609 mnas compared with £762 mn during FY17 and witnessed a decline of 20% on a year-on-year basis.

Profit before tax surged by 14.0% to £1,224 mn as compared with £1,073 mn during FY17. Net profit attributable to shareholders stood at £1,000 mn as compared with £827 mn during FY17. Basic earnings per share surged by 5.3 pence or 20.38% to 31.3 pence.

For FY18, dividend per share increased to £22.2 pence against the dividend of 21.8 pence during FY17 and witnessed an increase of 2%.

Financial Ratios


In FY 2018, the company’s Gross margin was considerably above the industry median and stood at 65.2%. However, from the EBITDA standpoint, BAE's performance was slightly below the industry median. BAE's operating margin of 9.5% was 160 bps higher than the industry median of 7.9%, and also BAE's reported Net Margin of 6.1% was 130 bps higher than the industry median of 4.8%. Also, the company has maintained consistency over delivering EBITDA margin above 10% since 2014.
BAE's return on equity (ROE) performance was considerably above the industry median and in FY18, ROE stood at 19.4% as compared with the industry median of 12.7%. The group has maintained consistency over delivering ROE above 15% since the last 5 years, which indicates strong financial management and fundamentals of the group.

From the Liquidity standpoint, BAE’s performance in terms of current ratio was slightly below the industry performance during FY18. For the financial year ended December-31-2018, the BAE's current ratio stood at 1.03 against the industry median of 1.18. However, in terms of quick ratio, BAE's performance was better than the industry median and stood at 0.95.

In terms of the Debt/Equity ratio, the company was highly leveraged as compared to its peers. Debt/Equity ratio for FY18 stood at 0.78 as compared with the industry median of 0.33 and Asset/Equity ratio of the group stood at 4.46 against the industry median of 2.66.

Valuation Methodology - 1

Valuation Methodology – 2
 

While Valuing BAE Systems on NTM Peers Price-to-Earnings multiple, we have considered peers like Rolls-Royce Holding Plc (NTM PE of 14.36x), Safran SA (NTM PE of 13x), Airbus SE (NTM PE of 12x), Meggitt Plc (NTM PE of 10.2x) and Cobham Plc (NTM PE of 11x) respectively

*All forecasted figures and peers have been taken from Thomson Reuters.
 
 Stock Performance – 1 Year

Daily price chart (as on April 08, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (as on April 08, 2019 at 01:20 PM GMT), shares of BAE Systems Plc were quoting at GBX 505.20 and added 0.8 points or 0.15% above its previous day close. During the past one-year, shares have registered a 52w high of GBX 680.60 and a 52w low of GBX 441.50 and at the current price level, shares were trading 25.92 per cent below its 52w high level and 14.20% above its 52w low price level.
In the past one-year, shares have delivered a price return of negative 15.52% and on a year-to-date basis, shares were up by 10% respectively.
Stock’s beta of 1.06, indicates that movement in the BAE’s stock was broadly in line with the movement in broader index FTSE 100.
BAE's dividend yield of 4.4% was relatively higher than the industry's average dividend yieldand was in line with the broader index FTSE100 dividend yield.
From the simple moving average (SMA) standpoint, shares were trading above its 30-day and 60-day simple moving average and below the 200-day simple moving average price.

Conclusion
BAE Systems is one of the world’s leading suppliers of defence equipment and system. On February 19, 2019, BAE announced it had been awarded two contract modifications worth up to US$575m for the LRIP of AMPV vehicles. In total, BAE had received contracts worth US$873mn for the LRIP phase. In this context, we hope it is clear there is no contradiction between the FY20 Budget's objective of developing and manufacturing the next generation of combat and tactical vehicles and the actual manner in which the AMPV programme is unfolding. In March 19, the U.S. Army officials have further postponed a decision on moving the BAE Systems' M109 howitzer into full production. The programme has been problematic for a while, with a six-month delay to production already reported in 2017, and further comments last summer from the Pentagon's contract management agency around poor welding, supply chain problems and delivery delays. BAE Systems commented at FY18 results that a decision around moving to full-rate production was expected in 2019. Based on the above rationale and the valuation done using above two methods, we have given a BUY recommendation at the closing price of GBX 504.20 (as on April 05, 2019) with single digit-upside potential, based on 7.8x NTM Industry Mean EV/EBITDA on FY19E EBITDA and based on 12x NTM Industry Peers Price-to-Earnings ratio on FY19E EPS respectively. 
 
*The buy recommendation is also valid for the current price as covered in the report (as on April-08-19).
 

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser. Our publications are NOT a solicitation or recommendation to buy, sell or hold.