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BAE Systems advances on all fronts with £46bn order book
Mark Milner
19 February 2009

BAE Systems today demonstrated the defence sector's ability to shrug off the gloom that has overtaken large sectors of the economy. Bolstered by a strong performance across the business, particularly from its land and armaments division which makes armoured fighting vehicles widely used in Iraq and Afghanistan, it turned in a sharp rise in sales, earnings and dividends for 2008.

The company said its order book had risen from £38.6bn to £46.5bn, helped in part by the weakness of the pound against the dollar and by contracts that include the aircraft carrier programme for the Royal Navy, a 15-year munitions contract from the Ministry of Defence and land vehicle orders from the US.

Ian King, who took over as chief executive from Mike Turner in September, said: "We are quietly confident about 2009."

BAE said all its main divisions – electronics, intelligence and support; land and armaments; programmes and support; and international – recorded higher earnings than in 2007. Overall earnings before interest, tax and amortisation climbing by almost a third, from £1.45bn to £1.9bn.

The company said it would "continue to increase the emphasis on maximising defence and security capabilities" across what it regards as its home markets – Britain, the US, Saudi Arabia, Sweden, South Africa and Australia – and is working hard to expand its presence in India.

Analysts have expressed concern that BAE could suffer from cutbacks in defence spending as government budgets come under pressure from the impact of the credit crunch and, in the case of Saudi Arabia, the fall in the oil price.

However, Howard Wheeldon, senior strategist at BGC Partners, said such concerns could be overdone: "Much is made in current difficult global economic markets about the prospect of defence cuts, particularly in the US. Clearly, with less available cash, governments are almost bound to cut back or delay defence projects if they can. For BAE, we believe that any cutbacks that may be seen in 2010/11 defence procurement budgets will likely have only minimal effects."

One area of concern has been the fall-off in orders for mine-resistant ambush protected (MRAP) vehicles from the US armed forces, for whom last year BAE completed an order for more than 4,000 vehicles. However BAE is bidding for a contract for another 2,000 MRAP vehicles and has already won a $3.7bn (£2.6bn) order for medium tactical vehicles.
BAE said the slump in equity markets had affected the group's pension schemes but its long-term funding plans were "deemed to continue to be reasonable" and it had agreed a plan to clear the deficit with the pensions regulator.

King said the company was making a one-off payment of £200m into the UK pension fund and $250m into the US pension fund. The group continued its expansion programme, spending just over £1bn on three acquisitions, but said good cash generation meant it retained a strong balance sheet.

The board is recommending a final dividend of 8.7p a share, which would bring the total for the year to 14.5p, a 13.3% increase over 2007. It said the pay-out was covered 2.6 times by underlying earnings and was in line with its policy of increasing the dividend at the same time as maintaining a long-term sustainable earnings cover of at least two times.

The Guardian


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