BAE Systems, the defence specialist, is at the forefront

BAE Systems is no longer a pariah, but a saviour to many investors. The latest call for more material by President Zelensky, at the second anniversary, has brought the spotlight back on arms manufacturers. BAE Systems’ announcement of its positive annual results last week, which included a wide range of weapons, including Eurofighter Typhoon Jets, nuclear submarines as well as missiles, bullets and bombs, could not have come at a better time.

Sales and earnings before interest and taxes both increased by 9 percent, respectively. This took its earnings per share to 63.2p, and led to a dividend increase from 27p this year to 30p.

In 2023, for example, the British government requested an eightfold increase of 155mm shells. The Czech Republic ordered 146 CV90 Infantry Fighting Vehicles. BAE also delivered 10 Eurofighter Typhoons the Qatar Emiri Air Force. The company signed a contract in December for up to $ 8.8 billion over ten years to manage the US Army’s main ammunition factory in Tennessee. It bought Malloy Aeronautics this month, a drone expert, at the same time the government announced a strategy for the deployment of unmanned systems.

Charles Woodburn, chief executive of the company, has a look ahead at three developments he believes will offer “multi-decades-long opportunities”. These include the next-generation of submarines, an agreement between Japan and Italy for the construction of the ultra-sophisticated Tempest jet fighter, and the $5.5-billion takeover of Ball Aerospace the Colorado-based maker of spacecraft and satellites.

There is a lot going on in a climate that encourages arms spending. The greatest cloud is the balmy years, when voters believed war was over and that taxes could be used for domestic matters. The governments are now afraid that their electorates won’t be happy with increasing military spending, or raising taxes and debt. Donald Trump continues to nag Nato members who haven’t committed to spending the agreed 2% of their gross domestic product for defence. Meanwhile, congressional maneuvering has slowed down America’s contribution to Ukraine. BAE has a backlog of orders worth £69.8billion, which is 2.7 times the sales for last year. This is more than enough to keep things moving.

Woodburn stated: “Our performance combined with our record order intake and global footprint means we are well-positioned to sustain growth in the future, while delivering greater value to our investors and communities where we operate.”

Air is the largest division in terms of both sales and profit. The second largest division in terms of sales is maritime, but its margins only reach 7.7%. Electronic systems, with a margin of 16.1%, takes the second spot for profit, with £878 millions. Cyber and intelligence is the fastest growing and most promising of all, with £2.3bn in sales and £199m pre-tax. The Donbas battlefields serve as a testing ground for the latest technologies.

The company forecasts a sales increase of over 10 percent in 2024, resulting in underlying profit before tax increasing by 11 to 13 percent and earnings per share increasing by 6 to 8 cents. These numbers disappointed analysts but may be more indicative of Woodburn’s caution rather than the health of the company.

Jefferies, an investment bank, believes that BAE’s enterprise values will fall from £40 billion in 2027 to £36.7billion by 2027. This is not a completely negative trend, as the debt and share buybacks will shrink by £800m. The fewer shares will boost the earnings per share to 89.79p in 2027. This will bring down the price-earnings to 13.6. The 42p dividend that is likely to be paid by 2027 will result in a yield of 3.6 percent at today’s share price.

Since the first Russian troops entered Ukraine, this column has recommended shares. Most recently, in June last year. There is no harm in making a profit but the shares should have more value if Europe or the United States keep their promises.

Hargreaves Lansdown has reached a critical point. The shares of Britain’s biggest wealth manager fell from £23.63 eight months prior to Covid in May 2019 to £7 in October last year, two months following the appointment of Dan Olley as chief executive. It is up to him to stop the slide.

Olley’s experience in digital technology gives us a clue as to the direction Hargreaves Lansdown will take. Olley, who has worked at Relx (the technical publisher), IBM (the American technology group), and WPP (the advertising conglomerate), became the chief executive of Dunnhumby in January, last year. It is alarming that he would change jobs so rapidly.

Olley, who has no previous experience in managing money, says he will use Hargreaves Lansdown’s digital capabilities to help him understand which products are best suited for each client, rather than replace the human element of the advice process. He says that despite his lack of experience managing money, Hargreaves Lansdown’s digital capabilities will help him to better understand the products that are best suited to each client. This is not to replace the human element in the advice process. He also stresses the importance of “delighting clients” and “enhancing client experience”. Which will triumph, the data or personal touch?

In the final six months of 2023 there were £1 billion in net new business. This is £600 less than one year earlier. Total assets under management increased to £142.2 Billion, from £127.1 Billion. The revenues rose from £368,2 million to £368.2 millions, but this was not enough for the pre-tax profit to rise by £15,1 million to £182,5 million. The company recruited 20,000 new net clients for a total of 1,82 million. The number of clients was lower than the 31,000 in 2022. This could be because of the increased cost of living. Olley has a long list of things to do.

Deutsche Numis lowered its earnings-per share forecast for the year end from 68.5p down to 66.9p and 4 percent next year up to 70.3p. The shares are only valued at 11.2 times earnings for 2023-24 and have a yield of 6.8 percent.