ALEXANDER CAMPBELL / LONDON
UK giant appears financially healthy, but efforts to find US partner continue to founder
BAE Systems' 2003 results - due at the end of this month - are expected to show a company in good financial health, but analysts are raising serious doubts about chief executive Mike Turner's long-term strategy for the company.
A recent report by the UK National Audit Office highlighted serious delays and cost overruns on four major BAE projects, but the company's financial results should still be positive, says Bank of America analyst Nick Fothergill. The affected projects are the Astute-class submarine, Nimrod MRA4 maritime patrol aircraft, Eurofighter Typhoon and the MBDA Brimstone anti-armour missile.
"It's now about trying to deliver on what they've got. They have to try to protect their limited earnings growth," says Fothergill.
Roman Szuper of rating agency Standard & Poor's says: "We expect to see improved profits and cashflow continuing from the first half of 2003 - improving from very low levels". BAE reported £5.68 billion ($10.4 billion) sales in the first half of the year, down slightly from £5.7 billion the year before, and analysts expect roughly flat sales with improved cashflow and slightly lower net profits.
BAE's share price is still far from recovering from the plunge it took in late 2002, when the full scale of the delays on Astute and Nimrod was revealed, but more surprises are unlikely, Fothergill says. "At the moment we are looking for no unexpected bad news," he says, but adds that he also does not expect any "pleasant surprises".
Turner has made it clear throughout his term at the head of BAE that he believes the company has to seek a US merger partner. However, no US companies seem to be interested. Years of speculation were ended last week when Boeing chief executive Harry Stonecipher announced that he was "not interested in [entering] the submarine or shipbuilding business". He added: "We like [BAE] as a company. It's just not an attractive target to us." Last year General Dynamics broke off merger talks with BAE, and Frank Lanza, chief executive of acquisitive defence electronics specialist L-3 Communications, has since ruled his company out, saying that he did not expect "any big bang acquisitions between international and US defence companies". BAE's continued low share price will mean that any transatlantic merger will be dominated by the more highly valued US partner.
With orders for aircraft such as the Typhoon likely to shrink or be delayed, the way forward is to "win as many network warfare contracts as possible", says Fothergill. BAE's rival Thales is strong in defence electronics and would be keen to merge as a way of evading EADS. "Thales does not want to go to EADS unless it's for a knockout price - the other house that would benefit from a merger with Thales is BAE."
Source: Flight International
