Bullish BAE Systems bucks trend

At first glance, the latest missive from BAE Systems is pretty glum. A lack of orders is forcing the defence giant to cut the production rate of its Typhoon aircraft, which will hit short-term profits. Writing down the value of the Williamstown shipyard in Australia - where new work has dried up - will too.

However, the longer-term outlook does appear to be improving and BAE expects to win some big contracts in the coming months. That does at least increase confidence that the attractive dividend will be maintained, and investors are piling back in.

Following news of its Middle Eastern Typhoon aircraft contract in September, BAE will start delivering the 28 planes to the Kuwait Air Force at the end of the decade. But with no order from the Saudis, BAE is lowering its Typhoon production rate to ensure work continues when current contracts dry up in 2018. This has forced bosses to cut 371 jobs.

"The lower production rate, together with the existing profile of contracted aircraft deliveries, is expected to result in Typhoon production sales reducing from approximately £1.3 billion in 2015 to approximately £1.1 billion in 2016," says the defence contractor.

Including a benefit of around 2p from adjustment of certain overseas tax provisions, BAE's underlying earnings per share for 2015 is expected to be around 38p, similar to last year.

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Bosses, however, are confident that more Typhoon contracts will be awarded over the next few months, although clearly there is no certainty. The Royal Saudi Air Force has already ordered 22 of BAE's Hawk advanced jet trainer aircrafts, associated ground equipment and training aids.

But the backdrop of the defence industry is looking better. In the UK, Chancellor George Osborne made commitments to defence spending this summer in the Conservatives' first budget for 19 years, which provides greater stability ahead of the upcoming Strategic Defence and Security Review. Over the pond, the US is also to increase its defence spend above previous Budget Control Act limits. BAE has been chosen to upgrade around 450 F-15 aircraft, for an initial contract value of $67 million, although that should rise to over $1 billion by the end of the programme.

Ahead of the December year-end, bosses are confident the group will report good sales growth this year, given its healthy £37.3 billion order backlog at the interim stage.

"Overall, the company is operating in an improving business environment and we continue to win new orders, with good prospects for the future," said chief executive Ian King.

Investors clung to the positives and BAE's share price shot up as much as 8% Thursday, putting the group on a price/earnings (PE) multiple of 12 times. Investec analyst Rami Myerson has put his "sell" rating, forecasts and 410p price target under review.

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