Analyst Note
| Joachim Kotze |Other than resuming its dividend payment, there were no real surprises in wide-moat BAE Systems’ first-half results. As communicated in the trading statement in June, the group experienced good growth in order intake of 11%, bringing the group’s backlog to GBP 46 billion. Free cash flow of GBP 120 million, excluding the GBP 1 billion one-off pension contribution, reflects a solid increase over the cash outflow in first-half 2019. Revenue growth of 4% was accompanied by EBITA decline of 10% due to under recoveries in the defense business and lower demand from the group’s commercial businesses. Management expects a recovery in the second half, with free cash flow guidance of GBP 800 million for the full year. The group’s broad exposure to platforms and geographies allow for stable and predictable cash flows underpinned by resilient defense demand and long-term multidecade contracts. Shares are trading higher on the results, but our GBX 570 (ADR: $30) fair value estimate still has decent upside. A relatively secure dividend yield of 4.7% makes the stock particularly attractive to income investors.