BAE Systems PLC – Completed the acquisition of GPS business

BAE Systems PLC (LON: BA) is a FTSE 100 listed Company, which provides security, defense, and aerospace related solutions. The Company’s segment includes Electronic Systems, Cyber & Intelligence, Security, Air, and Maritime.

Investment Rationale – Buy at GBX 526.80
 

1. Acquisition of GPS business would bolster the BAE’s position as a leading provider of defence electronics.

2. Order backlog has increased from the level seen at the end of FY19.

3. The net income margin and return on equity are better than the industry median.

4. The stock has yielded 10.16% of return in the past one month.
 

Recent News

31 July 2020: It has completed the acquisition of the Collins Aerospace Military Global Positioning System (GPS) business from Raytheon Technologies Corporation, for the consideration of US$1.925 billion, which has been funded from new external debt.

Half-Year Report (for the six months ended 30 June 2020)


(Source: Company Website)

As per the H1 FY20 results published on 30 July 2020, the Company delivered a robust performance and started FY20 from a strong position. The sales surged by 4% year-on-year on constant currency basis (CER) while underlying EBITDA decreased by 11% year-on-year on CER to £895 million in H1 FY20. After including the impact of £1 billion injection into the UK pension scheme, operating cash flow for H1 FY20 stood at £880 million. However, the order backlog has increased to £46.1 billion in H1 FY20 from the level seen at the end of FY19. On IFRS basis, basic earnings per share soared by 33% year on year.

Financial Position: As of 30 June 2020, the Company’s net debt increased to £2,038 million against the last year comparatives. Adjacently, cash and cash equivalents stood at £2,523 million at the end of H1 FY20.

One Year Share Price Chart


1-Year Chart as of 26 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)
 

Risk Assessments

The Covid-19 pandemic can have an adverse effect on BAE’s business, financial condition and operations as it can lead to delay in contracts, reduced spending by the major defense and commercial customers, cancellation of obtained contracts, and lack of funding availability. Moreover, the Company’s debt has significantly increased in H1 FY20 from the level seen at the start of FY20.

Valuation Methodology



Conclusion

BAE Systems has started the FY20 well with the strong financial position and decisive actions to ensure resilience. The demand for their capabilities remains high as it plays a prominent role in supporting national security, and therefore, it is expecting a strong second half of FY20. It has also completed two acquisition in H1 FY20, which shall boost sales by a low-single digit percentage compared to last year. For FY20, it expects underlying earnings per share to be slightly lower than FY19.

Stock 52 week High and Low were GBX 672.80 and GBX 428.60, respectively. From the technical standpoint, shares were trading well above the short-term support level of 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Over the past four years (FY15 – FY19), the Company’s revenue surged from GBP 16,787.00 million in FY15 to GBP 18,305.00 million in FY19. Compounded annual growth rate (CAGR) stood at 2.19 percent.

Based on the factors discussed above, we have given a “Buy” recommendation on BAE Systems at the current market price of GBX 526.80 (as on 26 August 2020, before the market close at 11.34 AM GMT+1) with lower double-digit upside potential based 20.00x Price/Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

IXICO PLC

IXICO PLC (LON: IXI) is an FTSE AIM All-Share listed Data Analytics Company, which provide services to Biopharmaceutical Companies for their clinical development programme.

Investment Highlights – Hold at GBX 82.75

1. The Company is expecting to deliver strong growth in H2 FY2020 with an increase in revenue of 20% and significant EBITDA Growth.

2. The Company continue to make investments toimprove efficiency and scale, which will generate higher revenue and continued operational leverage.

3. In the last three months and six months, the Company delivered a decent return of 19.06% and 19.93%, respectively, and delivered significantly higher returns compared to the FTSE AIM index.

Update on Trading Performance (24 August 2020)

The Company posted stronger growth in the second half of the financial year 2020 and stood ahead of forecasts, despite covid-19 pandemic. IXI was benefitted by operational leverage, driven by higher revenue and investments made to improve efficiency and scale. The Company expect revenue for the financial year 2020 to increase by 20% versus the prior year and in line with or slightly ahead of present market expectations. The Board also forecast that EBITDA will also be significantly ahead of current market outlooks. The enhanced financial performance for the financial year 2020 further boosts the confidence of the Company and the ability to make the investment to deliver profitable growth for a medium and long-term period.

One Year Share Price Chart

 
Daily Chart as of August 26, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Key Risks

The short-term headwinds arising from the Covid-19 pandemic can delay the clinical trials timelines. Moreover, the Company’s performance is subject to various kinds of risks, such as failure of IT infrastructure, termination of the client’s clinical trial contract, cyber-attacks, and strict regulatory policies.

Valuation Methodology

Technical Performance

The shares were trading well above the short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Conclusion

The Company is expecting stronger growth in the second half of the financial year 2020, with robust growth in revenue and EBITDA for the period. IXI is expecting to deliver profitable growth for a medium and long-term period based on enhanced financial performance for FY2020. Moreover, the Group has the ability to operate the business through a remote model during the pandemic. Further, the Company is increasing the deployment of artificial intelligence for advanced data analytics to enhance operational leverage. Overall, the Company is well-positioned to meet the client’s needs of FY20 and beyond to sustain the double-digit revenue growth. The stock made a 52-week high and low of GBX 98.00 and GBX 41.50, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance for IXICO at the current price of GBX 82.75 (as on 26 August 2020, before the market close at 11.10 AM GMT+1) and will recommend fresh buying at the right time.
 
*All forecasted figures and Industry/Peer Information have been taken from Refinitiv, Thomson Reuters.

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