Thursday 21 February 2019 7:19 am

BAE Systems profits rise but German ban on Saudi arms sales looms on horizon

Defence giant BAE Systems' shares dropped after it said Germany’s boycott on selling arms to Saudi Arabia could be "difficult" for the firm in the long run, and that it had been forced to mitigate supply chain disruptions from the embargo.

Announcing the company’s full-year results, chief executive Charles Woodburn said the firm was “taking a variety of planning and supply chain activities to minimise disruption,” as the UK continues trying to persuade Germany to lift the embargo for key defence projects such as the Eurofighter Typhoon aircraft.

Der Spiegel reported this week that Riyadh was already seeking compensation from Britain’s BAE Systems over Germany’s ban.

Woodburn told journalists the commercial problem was currently minimal, but “could become more difficult”.

“This is not a cliff edge scenario and we are working on a number of mitigation plans,” he said.

The firm, which was buoyed by a £1bn boost for Ministry of Defence (MoD) spending in Philip Hammond’s October budget, enjoyed a record intake of new orders last year.

The figures

Operating profit grew year-on-year in 2018, up 14.3 per cent from £1.4bn to £1.6bn, while revenue shrunk from £17.2bn to £16.8bn.

Order intake hit a record £28.3bn, up 39.4 per cent on last year’s £20.3bn, while its order backlog grew from £38.7bn in 2017 to £48.4bn last year.

Sales earnings were just below the firm’s November flat expectations, down from £18.5bn the previous year to £18.4bn in 2018. Net debt ballooned 20.2 per cent, from £752m to £904m.

But it was good news for shareholders, whose earnings per share rose 20.4 per cent to 31.3p, up from 26.0p the year before.

BAE Shipyards Face Threat Of Job Losses
BAE Systems is the Ministry of Defence's biggest supplier (Source: Getty)

Why it’s interesting

The recent political furore over Saudi arms sales has dominated the agenda for the defence giant. The firm is the lead partner for the pan-European consortium working on the Eurofighter in Saudi Arabia, and is tasked with maintaining the countries fleet of 72 jets, including supply new parts. Berlin’s decision to stop exports after the murder of journalist Jamal Khashoggi has been problematic the the consortium, whose supply chain relies on German cooperation.

Defence analyst Howard Wheeldon said BAE "continues to be reliant on the approval of export licences from a number of governments in order to continue supplies to its Saudi Arabia government customer.

"The export licence issue to which the company referred is one for governments alone to address and the point to emphasise here is that it is in the interests of all Eurofighter Typhoon partners – UK, Italy, Spain and Germany – that governments address the issue raised as a matter of absolute priority."

What BAE Systems said

Woodburn said the firm was working closely with the government to “minimise the risk” of the ban of Saudi arms.

He added: “This is a political issue to be resolved at a political level.”

Financial chief Peter Lynas added the expected reduction in Eurofighter Typhoon sales activity had been “offset by the US business,” which makes up 40 per cent of group sales.

Shares fell 5 per cent in early morning trading.