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BAE Systems, the UK’s biggest engineering company, has enjoyed a record year for new orders as western governments stepped up defence spending in response to Russia’s attack on Ukraine..

Britain’s premier defence contractor saw a record order intake of £37.1bn – taking its order backlog to £58.9bn.

BAE, whose current work includes building type 26 frigates for the Royal Navy, making electronic warfare systems for the F-35 jet fighter and making the Beowulf unarmoured all-terrain vehicle for the US Army, said it was expecting order growth this year to be better still.

Underlying operating profits for 2022 came in at £2.5bn – up 12.5% on 2021 – as top line sales grew by 4.4% to £23.3bn.

BAE, one of the biggest suppliers to the US Pentagon, also enjoyed a tailwind from the strength of the US dollar against the pound.

The results allowed the company to raise its dividend to shareholders for the 19th consecutive year.

But it was that big increase in the size of the order book that really caught the eye.

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The biggest portion of the new orders came in air, driven by new orders from Saudi Arabia and for MBDA, the European missiles systems business in which BAE is a partner.

The tanks will be able to automatically launch a counter-explosive at incoming anti-tank missiles. Pic: BAE Systems
Image:
Pic: BAE Systems

Maritime, driven by orders for the type 26 frigate and the UK’s dreadnought submarine programme, also contributed a big chunk of new business.

However, the other three key product and service areas – electronic systems, platforms and services and cyber and intelligence – all enjoyed growth in new orders as well.

The latter, while still the smallest part of BAE in terms of sales and profits, is among its most profitable businesses in terms of returns.

‘Tremendous potential ahead’

Charles Woodburn, the chief executive, said: “This is just the start. I still see tremendous potential ahead. We are investing in the business to support the future. We have leading technology solutions for our customers.”

He said BAE’s diverse geographic footprint, its deep customer relationships in the US, Europe and the Middle East and the multi-year nature of many contracts would create numerous opportunities in the future.

Mr Woodburn said it was not widely enough appreciated that BAE’s ability to export from the US, UK, Australia and Sweden meant it was “uniquely well equipped” to compete in multiple markets.

Re-equipping ammo stocks amid Ukraine war

He highlighted the urgent need to re-equip armed forces with ammunition – much of which has been diverted to Ukraine by its western allies – as one area where BAE’s strengths would stand it in good stead.

Read more: War in Ukraine helps boost earnings outlook at BAE Systems

BAE, which has two major Swedish subsidiaries in Hagglunds and Bofors, is also seen as a potential beneficiary if Sweden and Finland’s applications to join NATO are approved and the two countries raise defence spending accordingly.

Interestingly, while some of the sales growth is coming from BAE passing on inflation to customers, the vast majority comes from actually growing sales.

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Nov 2022: MD of BAE Systems’ naval ships business, speaks on Ian King Live

Only around a third of contracts are linked to the rate of inflation – a headwind that Mr Woodburn said BAE was increasingly comfortable with managing.

Cognisant of past criticisms of BAE for being too heavily dependent on Saudi defence orders, Mr Woodburn also stressed that no one programme represents more than 10% of group revenues.

UK-Australia security pact

Disappointingly, though, there was little news around the potential benefits for BAE from AUKUS, the new security pact between Australia, the UK and the US, which was announced 18 months ago.

Mr Woodburn said there was little he could say publicly but pointed to some work already being done around submarines – Australia’s decision to switch from French-made to British-made submarines created fury in Paris – cyber security and quantum computing.

The governments of the three countries are due to provide an update next month on the agreement and Mr Woodburn said he had no reason to think that would not be delivered.

There was, though, an update on the work BAE is doing as the lead contractor in the future combat air system programme, aimed at building Tempest, the sixth-generation jet fighter.

The project recently won a boost as Japan joined the Anglo-Italian programme. The company said work was progressing well and reiterated – as was announced before Christmas – that there are plans for the UK to lead the development of a new flying combat air demonstrator set to fly within the next five years.

The overall picture is one of a business that is diversified both in terms of its geographic footprint, customer base and its products and services.

Crucially, a major criticism often levelled at BAE in the past – that it fails to generate enough cash from its activities – also appears to be being addressed.

Shares of BAE, which with an increase of 48% have been the best performer in the FTSE 100 over the last 12 months, fell by just over 1% having hit an all-time high on Wednesday evening.

Rolls-Royce

Rolls-Royce takes City by surprise

Elsewhere, another of the UK’s big prestige engineering companies, Rolls-Royce, was taking the City by surprise with appreciably better results than expected.

The aircraft engine maker reported an underlying operating profit for 2022 of £652m – up 57% on 2021 – thanks to a better performance in its civil aerospace and power systems operations.

The shares were ahead by as much as 20% at one stage as investors digested not only this news but guidance that the company is expecting operating profits of £800m-£1bn for 2023.

Tufan Erginbilgic, the new chief executive, said Rolls had benefitted from a 35% increase in flying hours for its engines and highlighted new large engine orders received from Malaysia Aviation Group, Norse Atlantic Airways and Qantas.

He said Rolls was assuming large engine flying hours this year would come in at 80-90% of the 2019 level.

Underperforming for extended period

However, in his assessment or the company’s prospects, Mr Erginbilgic – a former BP executive who succeeded the long-running Warren East at the start of the year – pulled no punches.

He said Rolls had been underperforming for an extended period.

He added: “This is not just a COVID issue. Cash generation is unsatisfactory and our debt is too high.”

Mr Erginbilgic said too much of the company’s resources were simply covering its costs and interest payments and stifling its ability to invest.

He said it had a relatively high fixed cost base and lower profit margins than its rivals: “In the last five years, even excluding the COVID year of 2020, we have averaged a return on capital employed of just 3.5%.”

Arguing that Rolls had in the past lacked strategic clarity and tried to keep too many options open, he added: “I believe we have the potential to be a much higher quality and much more competitive company.

“We must only invest in new technologies where we are differentiated, where the market opportunity is sufficiently large and where there are synergies with our existing operations.”

‘Monumental uncertainties’

It will be tempting to suggest that, with massive demand still pent-up for flying, a strong 2023 for Rolls is all but guaranteed.

But Mr Erginbilgic warned there were “monumental uncertainties and challenges” in the guidance he was offering for the year, including inflation, potential supply chain disruption, interest rate rises and possible recessions around the world.

Investors also have other questions.

One is that, with civil aerospace set to continue growing in 2023, how easily they will be able to discern how well Rolls has done due to its own self-help measures – as opposed to just a general improvement in market conditions.

Looming redundancies but good potential to generate cash

Another is that with big a round of redundancies looming, Rolls may lose some people it would rather hang onto, due to the tight labour market.

Mr Erginbilgic said: “When we engage with our people, they are very excited about the future. Who doesn’t want to work for a successful company? And who wants to work for an underperforming company? Everybody has a role and we need to mobilise the whole workforce.

“Starting with clarity, why we need to change, and a very clear strategy, everybody knows their role.”

Rolls also still has net debt of £3.3bn and there is a degree of scepticism among investors that the company will be able to get that down by self-help measures and increased cash generation rather than by a sale of new shares.

This business, if it is managed the right way, has good potential to generate cash.

“We are already into our performance improvement agenda. We are looking to drive performance improvement as we speak. There is a huge sense of urgency there. Strategic clarity will follow that and then we will combine the two. Both of them will come together.”

After the near-death experience that the company went through during the pandemic, that will be music to the ears not only of investors but also the government, which is looking to Rolls to play a key role in the energy transition with the delivery of small modular nuclear reactors.

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Eco-tycoon Vince weighs sale of solar energy project

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Eco-tycoon Vince weighs sale of solar energy project

The energy group founded by Dale Vince, the eco-tycoon, is kicking off a hunt for investors in a solar park which is expected to become one of Britain’s biggest renewable energy projects.

Sky News understands that Ecotricity, Mr Vince’s company, has hired KPMG to explore talks with prospective investors or buyers for the project at Heckington Fen in Lincolnshire.

The development was approved by Ed Miliband, the energy secretary, earlier this year, and when completed it is expected to generate roughly 600MW of solar power.

It has been designated a Nationally Significant Infrastructure Project by the government.

Heckington Fen will also provide 400MW of battery storage capacity.

According to documents circulated to potential bidders, Ecotricity is prioritising the sale of 100% of the project, but is open to retaining a minority stake.

The company wants to complete a deal during the third quarter of the year.

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Responding to an enquiry from Sky News, Mr Vince said: “Heckington Fen is a fabulous opportunity; it’s also a massive one, possibly the biggest onshore renewable initiative in Britain.

“The project is shovel-ready with a grid connection in 2028 – something which is increasingly hard to find these days.

“Whilst this is a great project which is going to go ahead, the sums of money required to build this alone in a short timeframe, means we’re looking for investors or partners to help make this happen.”

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Sir Keir Starmer pledges to protect UK companies from Trump tariff ‘storm’

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Sir Keir Starmer pledges to protect UK companies from Trump tariff 'storm'

Sir Keir Starmer has said his government stands ready to use industrial policy to “shelter British business from the storm” after Donald Trump’s new 10% tariff kicked in.

The UK was among a number of countries hit with the lowest import duty rate following the president’s announcement on 2 April – which he called ‘Liberation Day’, while other nations, such as Vietnam, Cambodia and China face much higher US levies.

But a global trade war will hurt the UK’s open economy.

The prime minister said “these new times demand a new mentality”, after the 10% tax on British imports into America came into force on Saturday. A 25% US levy on all foreign car imports was introduced on Thursday.

It comes as Jaguar Land Rover announced it would “pause” shipments to the US for a month, as firms grapple with the new taxes.

On Saturday, the car manufacturer said it was working to “address the new trading terms” and was looking to “develop our mid to longer-term plans”.

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Jobs fears as Jaguar halts shipments

Referring to the tariffs, Sir Keir said “the immediate priority is to keep calm and fight for the best deal”.

Writing in The Sunday Telegraph, he said that in the coming days “we will turbocharge plans that will improve our domestic competitiveness”, adding: “We stand ready to use industrial policy to help shelter British business from the storm.”

It is believed a number of announcements could be made soon as ministers look to encourage growth.

NI contribution rate for employers goes up

From Sunday, the rate of employer NICs (national insurance contributions) increased from 13.8% to 15%.

At the same time, firms will also pay more because the government lowered the salary threshold at which companies start paying NICs from £9,100 to £5,000.

Also, the FTSE 100 of leading UK companies had its worst day of trading since the start of the pandemic on Friday, with banks among some of the firms to suffer the sharpest losses.

Sir Keir said: “This week, the government will do everything necessary to protect Britain’s national interest. Because when global economic sands are shifting, our laser focus on delivering for Britain will not. And these new times demand a new mentality.”

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Trump defiant despite markets

UK spared highest tariff rates

Some of the highest rates have been applied to “worst offender” countries including some in Southeast Asia. Imports from Cambodia will be subject to a 49% tariff, while those from Vietnam will face a 46% rate. Chinese goods will be hit with a 34% tariff.

Imports from France will have a 20% tariff, the rate which has been set for European Union nations. These will come into effect on 9 April.

Read more:
Red wall on Wall Street – but Trump undeterred
How will UK respond to Trump’s tariffs?

Sir Keir has been speaking to foreign leaders on the phone over the weekend, including French President Emmanuel Macron, Italian Prime Minister Giorgia Meloni and Australian Prime Minister Anthony Albanese, to discuss the tariff changes.

A Downing Street spokesperson said of the conversation between Sir Keir and Mr Macron: “They agreed that a trade war was in nobody’s interests but nothing should be off the table and that it was important to keep business updated on developments.

“The prime minister and president also shared their concerns about the global economic and security impact, particularly in Southeast Asia.”

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Trump’s warning

Mr Trump has warned Americans the tariffs “won’t be easy”, but urged them to “hang tough”.

In a post on his Truth Social platform, he said: “We are bringing back jobs and businesses like never before.

“Already, more than FIVE TRILLION DOLLARS OF INVESTMENT, and rising fast!

“THIS IS AN ECONOMIC REVOLUTION, AND WE WILL WIN. HANG TOUGH, it won’t be easy, but the end result will be historic.”

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Santander UK lines up ex-Treasury chief Scholar as new chair

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Santander UK lines up ex-Treasury chief Scholar as new chair

Sir Tom Scholar, the former top Treasury civil servant sacked by Liz Truss during her premiership, is being lined up as the next chairman of Santander UK, Britain’s fifth-biggest high street bank.

Sky News has learnt that Sir Tom, who played a pivotal role in the UK’s response to the 2008 financial crisis, is the leading candidate to replace William Vereker.

The appointment, which is subject to regulatory approval, could be announced later in the spring, according to insiders.

Sir Tom’s prospective recruitment comes amid a period of intense speculation about the future of Santander UK, which bulked up rapidly during the banking crisis by absorbing Alliance & Leicester and Bradford & Bingley.

The Spanish banking giant entered the British retail market in 2004 when it bought Abbey National, setting in motion a chain of dealmaking which would result in it becoming a serious challenger to Barclays, Lloyds Banking Group and NatWest Group.

If confirmed in the role, Sir Tom will follow a pattern of former senior public officials in taking on the chairmanship of Santander UK.

The post has been held in the past by Baroness Vadera, a Treasury minister during the 2008 meltdown, and Lord Burns, the former Treasury permanent secretary.

Sir Tom also held that latter role until his ousting during the shortlived Truss government, which led to him receiving a payoff of more than £350,000.

In addition to his position during the banking crisis, he was instrumental in devising the COVID-19 furlough scheme, which protected millions of private sector jobs during the series of lockdowns imposed on the British public.

He was widely respected among international banking regulators and finance ministers, and his sacking by Ms Truss sparked fury among senior civil servants.

Since leaving the Treasury, he has been appointed as chair of the European operations of Nomura, the Japanese bank.

At Santander UK, he will work closely with Mike Regnier, the former building society boss who has been its chief executive since 2022.

In recent months, there has been growing speculation that Santander UK’s parent is open to a sale of the business amid frustration about the scope and burden of British banking regulation.

Both Barclays and NatWest have been sounded out about a potential merger of their UK retail businesses with that of Santander UK, although formal talks have not progressed to a meaningful stage.

Ana Botin, Santander’s group executive chair, has appeared to publicly rule out a disposal, saying that the UK remains a “core market” for the group.

An attractively priced offer could yet gain Ms Botin’s attention, according to people close to the earlier talks.

One insider said, however, that Sir Tom’s recruitment was likely to dampen further speculation about a possible sale of the British business.

Shares in the Madrid-listed parent company, Banco Santander, have performed strongly in recent months, but fell by more than 8% on Friday as investors digested the fallout from President Donald Trump’s global tariffs blitz.

The company now has a market capitalisation of about €83.25bn (£70.7bn).

City sources said the search for Mr Vereker’s successor had been led by Heidrick & Struggles, the headhunter, in conjunction with Baroness Morgan, the former cabinet minister who sits on Santander UK’s board as its senior independent director.

This weekend, Santander UK said in a statement issued to Sky News: “Santander UK is conducting a thorough appointment process.

“The new chair will be announced once that process has concluded, including having obtained board and regulatory approval.”

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