BAE Systems: UK arms maker enjoys record year for new orders as West’s defence spending rises amid Ukraine war
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.
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.
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 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.
Water company United Utilities has reported hundreds of millions in profit as it seeks to further increase customer bills.
The utility serving seven million customers in the northwest of England recorded £335.7m in underlying operating profits for the first half of this year, up nearly 23% from £271.1m a year ago.
It comes as the firm has requested bills rise 32% to make them among the most expensive in England and Wales.
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The proposed average annual bill would increase to £584 by 2030 from the £443 typical yearly charge in the 2023/2024 financial year. Since April 2023 bills have been upped 6.4% and then 7.9%.
Bills hikes were behind the rise in revenue to more than £1.08bn from £975.4m in 2023.
Other ways of assessing profit were lower than the underlying operating sum. Profit before tax reached £140.6m while after tax profit topped £103.1m for the six months to the end of September 2024, both lower than a year earlier.
Boss’s pay
Bonus and benefits payments worth £1.416m were paid to two executives on top of £1.128m in base pay, according to analysis of company filings done by the Liberal Democrats.
It’s down compared with 2022/2023 when three executives were given £1.6m in base pay and £2.456m in bonuses and benefits.
Read more:
Water giant United Utilities strikes £1.8bn pension deal
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The environment
In a year of record sewage outflows into waterways the company was one of just three firms that met the Environment Agency’s top four-star performance ranking.
United Utilities in July came under investigation by water regulator Ofwat for not meeting its obligation to minimise pollution.
In response the company said at the time: “We understand and share people’s concerns about the health of the environment and the operation of wastewater systems, including combined sewer overflows.”
Pension “mega funds” will be created under government plans to increase infrastructure investment.
Reforms could “unlock £80 billion” of investment, according to Treasury plans, which say fewer but larger funds can get greater returns.
Chancellor Rachel Reeves wants to imitate the way large Canadian and Australian pension schemes work.
She said it marks “the biggest set of reforms to the pensions market in decades” ahead of providing more details in a speech at Mansion House on Thursday evening.
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Almost 90 local government pension pots will be grouped together, with defined contribution schemes merged and assets pooled together.
This is part of the government’s plan to increase economic growth through investing in infrastructure.
Pension schemes get greater returns when they reach around £20bn to £50bn as they are “better placed to invest in a wider range of assets”, according to the government.
This is backed up by evidence from Canada and Australia, the government argues – with Canada’s schemes investing four times more in infrastructure, and Australia three times more than the UK’s defined contribution schemes.
Rachel Reeves wants to reform pensions. Pic: PA
Pensions minister Emma Reynolds told Sky News larger pension schemes are able to invest “in a more diverse range of assets, including private equity, which are higher risk, but over time give a higher return”.
She said the government will not tell pension fund managers they must invest more in private equity but due to the larger scale they will be able to invest in a “broader range of assets, and that’s what we see in Canada and Australia”.
Ms Reynolds added that a Canadian teacher or an Australian professor is currently more likely to be invested in British infrastructure or British high-growth companies than a British saver, which she said is “wrong”.
The chancellor has said the changes would “unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off”.
However, Tom Selby, the director of public policy at financial company AJ Bell, said: “There needs to be some caution in this push to use other people’s money to drive economic growth. It needs to be made very clear to members what is happening with their money.”
The government says the funds will be regulated by the Financial Conduct Authority and will need to “meet rigorous standards to ensure they deliver for savers”.
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Chancellor eyes Canada-style pension reform
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Local government pensions v defined contributions
The Local Government Pension Scheme in England and Wales will manage assets worth around £500bn by 2030.
These assets are currently split across 86 different administering authorities, with local government officials and councillors managing each fund.
Under the government plans, the management of local government pensions and what they invest in will be moved from councillors and local officials to “professional fund managers”.
This will allow them to invest more in assets such as infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants, the government said.
Defined contribution pension schemes are set to manage £800bn worth of assets by the end of the decade.
There are around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The government will consult on setting a minimum size requirement for these funds.
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Businesses cautious – but pensions sector backs plans
Businesses will need to be reassured that the government’s plans are watertight following the fallout from the budget, according to the trade group the Confederation of British Industry (CBI).
The CBI’s chief economist Louise Hellem said: “While the chancellor is right to concentrate on mobilising investment, putting pension reform to work for the government’s growth mission, unlocking investment also needs competitive and profitable businesses.
“With the budget piling additional costs on firms and squeezing their headroom to invest, the government needs to work hard to regain the confidence in the UK as a place businesses and communities can succeed.
“Pension schemes will want to operate within a UK economy that is prospering.”
Keep up with all the latest news from the UK and around the world by following Sky News
But key parts of the pensions sector gave their backing to the government’s plans, including Standard Life, Royal London, Local Pensions Partnership Investments and the Pensions and Lifetime Savings Association.
Deputy Prime Minister Angela Rayner said: “This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”
Consumer rights group Which? is suing Apple for £3bn over the way it deploys the iCloud.
If the lawsuit succeeds, around 40 million Apple customers in the UK could be entitled to a payout.
The lawsuit claims Apple, which controls iOS operating systems, has breached UK competition law by giving its iCloud storage preferential treatment, effectively “trapping” customers with Apple devices into using it.
It also claims the company overcharged those customers by stifling competition.
The rights group alleges Apple encouraged users to sign up to iCloud for storage of photos, videos and other data while simultaneously making it difficult to use alternative providers.
Which? says Apple doesn’t allow customers to store or back-up all of their phone’s data with a third-party provider, arguing this violates competition law.
The consumer rights group says once iOS users have signed up to iCloud, they then have to pay for the service once their photos, notes, messages and other data go over the free 5GB limit.
“By bringing this claim, Which? is showing big corporations like Apple that they cannot rip off UK consumers without facing repercussions,” said Which?’s chief executive Anabel Hoult.
“Taking this legal action means we can help consumers to get the redress that they are owed, deter similar behaviour in the future and create a better, more competitive market.”
Apple ‘rejects’ claims and will defend itself
Apple “rejects” the idea its customers are tied to using iCloud and told Sky News it would “vigorously” defend itself.
“Apple believes in providing our customers with choices,” a spokesperson said.
“Our users are not required to use iCloud, and many rely on a wide range of third-party alternatives for data storage. In addition, we work hard to make data transfer as easy as possible – whether it’s to iCloud or another service.
“We reject any suggestion that our iCloud practices are anti-competitive and will vigorously defend against any legal claim otherwise.”
It also said nearly half of its customers don’t use iCloud and its pricing is inline with other cloud storage providers.
Keep up with all the latest news from the UK and around the world by following Sky News
How much could UK Apple customers receive if lawsuit succeeds?
The lawsuit will represent all UK Apple customers that have used iCloud services since 1 October 2015 – any that don’t want to be included will need to opt out.
However, if consumers live abroad but are otherwise eligible – for example because they lived in UK and used the iCloud but then moved away – they can also opt in.
The consumer rights group estimates that individual consumers could be owed an average of £70, depending on how long they have been paying for the services during that period.
Apple is facing a similar lawsuit in the US, where the US Department of Justice is accusing the company of locking down its iPhone ecosystem to build a monopoly.
Apple said the lawsuit is “wrong on the facts and the law” and that it will vigorously defend against it.
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Big tech’s battles
This is the latest in a line of challenges big tech companies like Apple, Google and Samsung have faced around anti-competitive practices.
Most notably, a landmark case in the US earlier this year saw a judge rule that Google holds an illegal monopoly over the internet search market.
The company is now facing a second antitrust lawsuit, and may be forced to break up parts of its business.
Read more: Google faces threat of being broken up
File pic: Reuters
And in December last year, a judge declared Google’s Android app store a monopoly in a case brought by a private gaming company.
“Now that five companies control the whole of the internet economy, there’s a real need for people to fight back and to really put pressure on the government,” William Fitzgerald, from tech campaigning organisation The Worker Agency, told Sky News.
William Fitzgerald at Lisbon’s Web Summit, where he spoke to Sky News
“That’s why we have governments; to hold corporations accountable, to actually enforce laws.”
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