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Sunday, February 14, 2010

BAE hopes results will signal a new start

Astute with convoy of boats

The two fines of $400m (£255m) and £30m that the company has agreed to in order to settle investigations with the US Department of Justice and the Serious Fraud Office respectively will be paid for from last year's earnings, removing what has been a significant source of uncertainty for shareholders in recent years.

Analysts are forecasting sales of around £21.5bn, up from £18.5bn and earnings before interest and taxes of £2.2bn, compared with £1.9bn last year. That excludes the fines, but the company is also in line for a tax gain of around $410m from its US business.

The fines will knock about 8p a share off earnings, which is "easily affordable", analysts at Citigroup said.

Orders for new equipment and service contracts in the UK are expected to account for a significant proportion of earnings growth. During 2009, the Ministry of Defence agreed to buy the third block of Eurofighter Typhoon jets, and deliveries of that plane to Saudi Arabia got under way. The company also won maintenance contracts for the Harrier and Typhoon.

Work on the Type 45 destroyer and Astute nuclear-powered submarine have stepped up and steel was cut on the first of two aircraft carriers for the Royal Navy. The Government reiterated its commitment to the £5bn carrier programme as part of a defence green paper earlier this month, although all large projects will come under scrutiny in the strategic defence review to be carried out after the general election.

However, the increase in orders was not enough to halt BAE announcing more than 2,000 job cuts in Britain last year. Last week, the company said another 230 staff would go from its submarine business.

The job losses are linked to the end of some programmes such as the replacement of the Nimrod spy plane and moves to try to cut costs as the MoD faces a serious squeeze on its budget.

The engine of BAE's growth in recent years has been the MRAP mine-resistant vehicles and the Bradley fighting vehicles made by its US business. But the MRAP order peaked in 2008 and BAE missed out on a contract to supply the vehicles to US forces in Afghanistan in 2009.

The company has protested against the US's decision to award another follow-on contract for armoured trucks to an American rival. It has held the contract since 1990 through the Armor Holdings business it bought in 2007.

If BAE's challenge is unsuccessful, the company has said it will have to take a substantial impairment charge against the Armor deal.

BAE reported a £1bn jump in its pension deficit to £3.1bn at the end of the first half last year, after reducing its future inflation assumption. That weighed on the shares at the time, but analysts at UBS don't expect a material change in the size of the deficit at the full year.

The UBS analysts also say a share buy-back could be in the offing, with the company generating around £1bn of cash a year and no obvious large acquisitions to make. (Source telegraph)