BAE Systems shares jump 3% as it reported first half revenues up 10% year on year. Net debt reduced to £1.7bn from over £2bn at the end of 2016.

As BAE Systems updates the market Helal Miah, investment research analyst at The Share Centre, explains what it means for investors.

This morning, defence and engineering giant BAE Systems reported first half revenues of £9.57bn and underlying operating profits of £945m, up 10% and 11% respectively on the same period last year and both ahead of the market’s expectations.

Overall operational performance was in-line with management’s expectations as the group delivered on a number of contracts while securing others. These include a £3.7bn production contract for an initial batch of three Type 26 frigates, £1.4bn contract for the sixth Astute Class submarine, plus others for the total order intake during the first half of £10.7bn and taking the order book level higher to £42.3bn.

BAE Systems (PD)

Investors should appreciate that management reduced the net debt to £1.7bn from just over £2bn at year end while the pension deficit also fell modestly to £5.9bn from £6.1bn. Overall these are good numbers which pleased the market as the share price was driven up 3% in early morning trading.

The sector is emerging out of the tough economic environment as a result of strained government budget deficits a few years ago.  The group is set to further benefit from the improvement in government spending over the next few years especially from the Trump administration’s stance on defence & security. As management continue to keep a focus on operational efficiency and with the good order intake, investors should note that they still expect to deliver underlying earnings per share rise of between 5-10%.

The only real disappointment comes from the group’s Cyber & Intelligence division where management said that restructuring was needed, despite this; the group’s smallest division saw good growth rates and this should continue in a world where cyber security and intelligence is becoming ever more important.

We are pleased with this set of results, as clearly is the market. We therefore continue with our medium risk ‘buy’ recommendation for investors as the defence market is expected to continually improve and the dividend remains very attractive. The company is suitable for investors seeking a balanced return and willing to accept a medium level of risk.

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