BAE bounces on buyback, soothes U.S. budget worries

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BAE Systems Plc upped its dividend and announced a 500 million pound share buyback as it moved to reassure investors the British firm can navigate through military spending cuts in the UK and United States.

Shares in Europe’s biggest defence contractor rose 5 percent as Chief Executive Ian King told reporters the company was in a “sweet spot” in the United States despite budgetary uncertainty there and falling sales across the group.
“We still think we’re in the fast lane and the sweet spot of government spending in the U.S. We’re seeing contracts coming through — the order backlog is reducing,” King said during a conference call, Reuters reports.
“The order book is pretty strong relative to the conditions that exist; we also have an order backlog, so orders we have won, but are not yet funded because in the U.S. it is done on a yearly cycle. That’s showing good progression.”

King sounded the upbeat note as the maker of naval destroyers, submarines and Bradley military vehicles said profit before tax in the first half of 2011 reached 691 million pounds, down from 781 million a year ago.

The fall came after an anticipated 13 percent drop in headline sales to 9.2 billion pounds from 10.6 billion and profits took a further knock from a 160 million pound charge taken on a troubled Omani patrol vessel contract.

The company warned last month that following sea trials it expected the programme to suffer significant cost overruns.

A one-off benefit of 125 million pounds from a settlement agreement with the Ministry of Defence mitigated some of the damage.
“In aggregate, the group anticipates that underlying earnings per share for the year will be broadly similar to 2010’s restated earnings,” the company said on Thursday.

BAE, which is involved in the production of F-35 jets and Astute class submarines, said it continued to expect a fall in sales for the full year, primarily due to weakness at its land and armaments unit, which makes artillery and armoured vehicles.

LOWER SALES

Sales in the division fell 40 percent in the first half compared with the same period a year ago, reflecting lower levels of demand from the U.S. government to which it supplies Bradley fighting vehicles and the end of a contract supplying the U.S. Army with medium tactical vehicles.

The group, which has cut around 15,000 employees in the last two years in a bid to lower costs, said the Land & Armaments division alone had now cut headcount by 40 percent since 2009.

Britain last year slashed its defence budget by 8 percent to help reduce its deficit — cutting its army, navy and air force — hitting arms makers such as BAE, which makes around a fifth of its revenue in the UK.

The UK intends to publish a 10-year equipment plan in September and plans to increase the defence equipment budget modestly after the 2015 spending review.

Uncertainty about the future path of U.S. defence expenditure — the source of around half of BAE’s sales — has dominated sentiment towards BAE, whose shares had fallen 9 percent in the last three months.



The stock was up 4.8 percent at 306.4 pence by 9:10 a.m., valuing the group at over 10 billion pounds.
“Today’s results are broadly in line and the weakness in (the) top-line was expected,” analysts at Morgan Stanley wrote in a note to clients, maintaining their “equal weight” rating on the stock.
“The 500 million pound buyback announced today should be positively received (particularly given the stock’s recent weak performance). However, a material re-rating continues to depend upon BAE’s ability to offset the fall in U.S. Land & Armaments.”