Steady as She Goes; BAE Systems Maintains Full-Year Guidance; Fair Value Estimate Unchanged

Wide-moat BAE Systems increased its order intake by 14% year on year to GBP 10.6 billion for the first half of 2021 at an approximately 1.1 times book-to-bill ratio, maintaining the group’s GBP 45 billion backlog. Free cash flow of GBP 460 million compares with an outflow of GBP 110 million in the prior-year comparable period and puts the group on the right track to achieve its full-year guidance for free cash flow in excess of GBP 1 billion. Organic revenue growth of 6% was complemented by EBITA growth of 27%, as the majority of business lines recovered from the relatively low 2020 base. Management maintains guidance for 2021 midpoint revenue and EBITA growth of 4% and 7%, respectively, while targeting GBP 4 billion of cumulative free cash flow (about 25% of current market value) over the next three years. The group’s broad exposure to platforms and geographies allows for stable and predictable cash flows, underpinned by resilient defense demand and long-term multidecade contracts. We don’t expect to make any major changes to our GBX 595 (ADR: $32.50) fair value estimate, which suggests shares are nearing fair value. A relatively secure dividend yield of approximately 4% makes the stock particularly attractive to income investors.