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BAE Systems sees 2016 growth on military spending recovery, cyber security demand

LONDON (Reuters) - BAE Systems BAES.L, the world's third-largest defence contractor by revenue, forecast that annual earnings would grow by up to 10 percent this year as military budgets recover and demand for cyber and commercial electronics grows.

A union flag flies over the entrance to the naval dockyards, where BAE Systems are also located, in Portsmouth, southern England in this November 6, 2013 file photo. REUTERS/Stefan Wermuth/Files

The company was buoyed in November when after years of cuts, Britain increased its budget for defence equipment, and it will also benefit from rising military spending in the United States.

BAE had made cutbacks last year, when it slowed production of the Eurofighter Typhoon to be able to keep manufacturing it over a longer period, and a wait for another major order for the jet from Saudi Arabia continues.

Saudi Arabia accounts for a fifth of BAE’s sales, about the same as Britain, while just over a third of sales come from North America.

Despite the slowdown in Typhoon production, Chief Executive Ian King gave a reassurance on Thursday that BAE expectations for further orders of that aircraft remained the same.

“That doesn’t change our commitment to these programmes and our view of timing of activity in Saudi,” he said, adding that discussions with that customer continued. “Talks are always ongoing because we have a relationship which is enduring.”

Among other projects, BAE is working on plans to build a replacement for Britain’s submarine-borne Trident nuclear weapons system, and it supplies electronics to the U.S.-built F-35 Joint Strike Fighter (JSF) aircraft.

For 2016, BAE forecast that EPS would grow by between 5 percent and 10 percent from the 36.6 pence level it posted for last year, putting the company on track to meet a market forecast of 39.7 pence according to Reuters data.

Growth is expected in BAE’s cyber and intelligence business, as governments and companies spend more on data security, and on higher sales from providing aircraft support to the higher numbers of Typhoons now operational.

The company's shares climbed 1 percent to 504.5 pence, outperforming Britain's bluechip market, which was trading 0.5 percent lower. Over the last three months since Britain committed to higher military spending, the stock has risen 6 percent, versus a 5 percent fall in FTSE 100 .FTSE.

“BAE’s long-term outlook seems positive – increased global tension, JSF, Trident Successor – but the main near-term attraction is relative certainty in a nervous market, in our view,” Jefferies analyst Sandy Morris said.

BAE unveiled succession plans earlier this week when it lined up former oil executive Charles Woodburn as heir apparent for the chief executive’s job, naming him the company’s new chief operating officer.

Reporting by Sarah Young; Editing by Paul Sandle/Mark Heinrich

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