Morningstar | Decent Order Intake but Weak Profitability for BAE Systems in 1H; Shares Fairly Valued
After publication of first-half 2018 results, we are maintaining our fair value estimate of GBX 630 per share for BAE Systems' London-listed shares and $35 for the ADR, along with our narrow moat rating. The results were slightly below our expectations, but modest downward revisions of 2018 estimates are largely offset by lower pension deficit estimates. Revenue in the first half was down 7% on a reported basis and 3% organically as strong F-35 and APKWS production volumes (booked in electronic systems division) were more than offset by a double-digit sales decline in the air division as a result of the completion of large European and Oman Typhoon programmes. The value of BAE's underfunded pension plan was GBP 3 billion at the end of June, a solid improvement on the GBP 3.9 billion deficit at year-end 2017. For the remainder of 2018 and 2019, we expect BAE Systems to continue to benefit from increasing defense budgets around the globe, the ramp up in production of the F-35 programme, and the extension of the Saudi British Defence Co-operation Programme until 2021 (Saudi Arabia is one of the firm's main markets, as approximately 27% of group revenue is generated here). However, we believe the shares are fairly valued at current levels.Our view of operational and market improvements is supported by the BAE order backlog, which increased by GBP 1 billion to GBP 39.7 billion as at the end of June 2018. In the first half of 2018, BAE Systems had solid commercial momentum with GBP 9.7 billion of orders, including wins on the Australian SEA 5000 and U.S. Amphibious Combat Vehicle programmes. The order backlog and third-quarter order intake does not yet include the SEA 5000 warship programme, nor the contract for the supply of 48 Typhoon aircraft to Qatar, both of which are expected to be booked in the second half of the year.
BAE Systems is a defense, aerospace and security solutions provider. Co. supplies defense equipment, electronics and services, and cyber, intelligence and security solutions for governments and commercial markets. Co.'s offerings include the: manufacture of Typhoon assemblies for European partner nations and other export customers; design and manufacture of sub-assemblies in the U.K. and provision of equipment in the U.S.; development of future air system capabilities, including unmanned air systems; maintenance, support and training for Typhoon aircraft in service with the U.K. and Saudi Arabian air forces; and design, manufacture and support of defense and commercial avionics equipment.
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