As the clouds of uncertainty lift, its discount to US peers is unwarranted

UNCERTAINTY is the biggest killer of all. With a strategic defence review set to follow the election here in the UK and the Obama administration slashing big Pentagon weapons programmes, BAE appears to be shrouded in it. But yesterday’s full year results show the clouds are clearing.

It has paid $400m and $30m to settle corruption programmes by the US and UK authorities respectively. The loss of a key truck contract at US firm Armor Holdings hit it with a £973m writedown, meaning pre-tax profits for the year were 88 per cent lower at £282m. But with these one-off costs stripped out, BAE’s profits were up 17 per cent. Sales advanced 21 per cent to £22,415m, a healthy seven per cent rise once M&A is stripped out indicating that a bid for Babcock, currently chasing VT group, while much mooted is not necessary or desirable.

A 10 per cent dividend increase and £500m buyback programme will solve the issue of too much cash on its balance sheet for now.

But its biggest trump card is its established operations in international defence markets including South Africa, and Saudi Arabia. Yesterday India was confirmed as the group’s seventh so called “home” market – where it doesn’t just sell military systems but also has subsidiaries that are an integral part of the country’s defence industry. A quarter of its business now comes from these growing markets, with another quarter from the UK, and half from the US.

With its shares down 9.4 per cent over the past year, it is trading at just 8.3 times forward earnings compared to its US peers trading over 10.5 times. There is no good reason for this disparity.