BAE Systems Benefiting From Heightening Geopolitical Risk -- 2nd Update

By Anthony O. Goriainoff and Mauro Orru

BAE Systems has been a top beneficiary alongside other European arms manufacturers from the West's drive to arm Ukraine in the face of Russia's invasion, and looks set to continue doing so as governments spend more on military equipment.

Members of the North Atlantic Treaty Organization have been shipping tanks, rocket launchers, air defenses, ammunition and other military equipment to Ukraine, and are now seeking to replenish their stockpiles through orders with defense manufactures.

Some of its military equipment, such as the M777 howitzer, has been widely used by Kyiv forces and, earlier this year, Ukraine received Bradley fighting vehicles as well as Challenger 2 tanks. BAE Systems said on Monday that it expects to report another year of robust sales and earnings growth on the back of heightened geopolitical risks.

Its shares rose as high as 1,116 pence in early trade, up from the roughly 600 pence in the days prior to Russia's invasion of Ukraine on Feb. 24 last year, giving it a current market value of about 33.65 billion pounds ($41.14 billion), according to FactSet.

The U.K. defense-and-aerospace group said order flow on both new and existing programs remains strong, underpinning expectations for good top-line growth in the coming years. Most major defense programs were long term in the build and support phases, and as a result of this the contracts it secures now will be executed over many years, it said.

So far this year, the company has booked over GBP30 billion in orders, including around $800 million for Bradley fighting vehicles used by the U.S. Army as well as upgrades. Orders also include around $500 million for the Archer artillery system from Sweden, and $797 million to start full-rate production of the armored multi-purpose vehicle--which includes prior funding for early order materials--for the U.S. Army. It makes a range of military hardware and software, mainly in the U.S. and U.K.

Like German peer Rheinmetall, BAE also backed its guidance for 2023. It expects sales this year to be 5% to 7% higher than the GBP23.26 billion reported in 2022. Underlying earnings before interest and taxes--the company's preferred profitability metric--are seen 6% and 8% higher than the GBP2.48 billion achieved a year earlier. Free cash flow is seen at more than GBP1.8 billion from GBP1.95 billion in 2022.

Rheinmetall, meanwhile, targets sales in the 7.4 billion euros and 7.6 billion euros ($7.91 billion and $8.12 billion) range, up at least EUR1 billion from a year earlier.

At 1202 GMT, BAE shares were up 3.50 pence, or 0.3%, at 1,107 pence. The stock is up almost 30% since January.

Write to Anthony O. Goriainoff at anthony.orunagoriainoff@dowjones.com and Mauro Orru at mauro.orru@wsj.com

(END) Dow Jones Newswires

November 13, 2023 07:22 ET (12:22 GMT)

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