BAE sees 'modest' hit from UK spending review

Defence contractor BAE Systems says the impact on its business of the UK’s cuts in defence spending will be “modest”, though order cancellations will hit its growth in 2010 and reduce earnings by about 2% next year.

“The group anticipates some modest impact on performance of its UK business in 2010 from the changes [made in the UK Strategic Defence and Security Review],” the company said in a trading statement on Thursday.

BAE, Europe’s largest arms contractor, said the changes would hit growth this year and knock one pence a share off annual earnings from next year.

Britain’s government this week unveiled plans to cut back its army, navy and air forces as part of the harshest public spending cuts for a generation.

The armed forces review, the first since 1998, unveiled a military with fewer people, fewer ships, fewer aircraft, fewer nuclear warheads and a smaller budget.

The company, re-named following the takeover of Marconi Electronic Systems by British Aerospace in 1999, now generates just 20% of its revenues in the UK and 54% in the United States.

Shares in BAE, which have risen 10% in the last month, recovered early losses and were 1,8% up at 356 pence by 10.50am GMT, valuing the company at about £12,4-billion ($19,6-billion).

“They’re putting a brave face on the impact SDSR cuts will have but there’s clearly a lot more they need to talk through with the government,” said Société Générale analyst Zafar Khan.

“The one pence reduction in EPS equates to around 2,5% below the consensus forecast—growth prospects for defence firms don’t look great at the moment.”

Prior to its statement BAE was on average expected to generate earnings of 42,5 pence a share in 2010 and 43,4 pence next year, according to Thomson Reuters I/B/E/S Estimates.

Britain said the BAE-made Harrier aircraft would be retired from service but that its fleet of Tornados would be maintained.

Orders for nine of BAE’s Nimrod MRA4 reconnaissance aircraft, due to start entering service this year, have been scrapped, while its requirement will be reduced for US F-35 Joint Strike Fighter jets being developed by Lockheed Martin in a partnership which includes BAE.

Implications
However, the Royal Navy plans to go ahead with an order for seven BAE built Astute submarines and two new aircraft carriers, of which BAE is a lead member of the manufacturing consortium.

BAE said it would work with the UK Ministry of Defence (MoD) to thrash out the implications of the changes to orders, though welcomed the removal of uncertainties which had hung over the business in recent months.

It said it had made allowance in its planning assumptions for possible changes to orders and had introduced measures to mitigate likely reductions in activity.

Last month it announced plans to shed 740 jobs at its British military aerospace business.

Outside of Britain, BAE said its US business was performing well.

BAE also said it could take a £150-million hit this year after Trinidad and Tobago said it would cancel a contract to acquire three patrol ships after become increasingly frustrated by delays to the project.

In its latest defence strategy review, the traditionally pro-military Conservative Party, which leads the coalition government, increased its focus on cyber security and pledged to spend an extra £650-million on it over the next four years.

This was welcomed by BAE, which has sought to anticipate more spending on intelligence and cybersecurity services, and it said its acquisition of L-1 Identity Solutions’ US counterterrorism business was likely to be completed by the end of 2010. - Reuters

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