Thursday, 16 February 2012

BAE: 2011 Preliminary Results.

BAE @ 320.70p, -12.3p (-3.69%), as at 9:14am.

Expected but still baffled by the behaviour. 
What am I referring to? Well, BAE reported today and almost immediately fell to the levels shown above.
I guess I am not actually surprised by the fall as I have been fully led to expect preliminary results that would be at least 10% down on the previous year, or at least there has been enough concerns around defence sector spending cuts, BAE's struggle with recent Eurofighter contracts, and plentiful analyst and media segments in the run-up to the results outlining the tough market conditions as justification for an expected 10% fall in sales.
In light of that it has been hugely surprising to see BAE taking part in the markets rally and appreciating from the 280p's in January to yesterday's 333p.
Thats not to say that the company doesn't have financial strength to go with its significant position in a significant market but the current mindset of markets is to focus on growth which the company can't point to.

Looking at the preliminary statement:
- Sales were down 14% at 19.154bn (22.275bn) but,
- pre-tax profits were up 2.75% at £1.493bn (£1.453m)
- Full year divided increased to 18.8p (+7.4%) and dividend cover maintained at 2.42 times

Concerning that operational cashflow has halved which directly impacted the company's cash balances which have fallen from £2.813bn to £2.141bn. This might be due to the referenced delays in Saudi Typhoon contract changes?
It looks like the company has also restructured some of its debt as well with £1-1.5bn being restructured and reclassified from current to non-current liabilities. Although, this probably has much to do with net interest payments falling to £114m from £192m last year.
Shareholders percentage of profits has also increased, to 98.7% from 97.3%, so minority interests have reduced.
Dividend cover has been maintained at 2.42 times despite the increase of 7.4% which takes the full year dividend up to 18.8p per share.

So with flat sales being forecast for the next couple of years the company is consolidating at best. Which might not be a bad thing given the current economic climate and might indeed be a reality check to what can be expected in the wider market. 
Despite flat sales, the company suggests that earnings will increase again in 2012, if only modestly. Reading the company's statement this looks to be due to anticipated benefit in some margins, and reduced finance costs.

As ever I am really looking for cashflow per share to be higher than earnings per share so the cashflow position, or cashburn in this instance, is still concerning and requires trust in the company's management to look after the balance sheet, and working capital during a constrained market opportunity.
But, suffice to say I am concerned and need to keep a closer eye on BAE's financials, watching for any further deterioration or, hopefully, an upturn in its fortunes.

At 320.7p the investment has delivered an almost non-existent 0.46% gain in the share price but has yielded 10.84% in dividends, so it hasn't been the greatest investment. Steady at best.
On a single digit PE when I first invested I was hopeful of a 20% recovery in the share price but with hindsight the company has probably performed almost in line with the zero growth forecast over the 1-3 year horizon, hence the perceived discount.
Still disappointing though.
I wouldn't normally be too concerned but for the deterioration in cashflow.

Looking ahead then, to the 11.3p per share dividend, the shares go ex. dividend on the 18 April and the payment date is 1 June.

BAE 2011 Preliminary Announcements and Presentations:

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1 comment:

  1. With that write up I'm surprised you're not dumping them