BAE warns on Saudi jet deal risk

BAE Systems has warned its earnings could suffer a bigger than expected hit if its protracted negotiations over the pricing of an important Saudi Arabia jet fighter contract extended beyond the end of the year.

Europe’s biggest defence company by sales has been negotiating for two years with the kingdom over pricing on its Salam deal for 72 Typhoon fighter jets. BAE had delivered 24 aircraft to the Saudis and added a further four deliveries in the first half of 2013, but talks over the remainder of the contract continue.

BAE said in an interim management statement on Thursday: “The group’s guidance continues to anticipate a satisfactory completion to the Salam pricing negotiations this year. However, should negotiations extend beyond the year end, earnings per share for 2013 would be impacted by approximately 6 to 7 pence.”

Robert Stallard, analyst at Royal Bank of Canada, said the potential earnings hit was bigger than expected and that the delay in the Saudi deal had slowed the pace of BAE’s share buy-back programme.

“[The] Salam earnings per share impact has moved up more than we had expected,” he said, adding: “A settlement would remove some risk and potentially allow for a pick-up in the buyback.

Earlier this year BAE announced it would buy back up to £1 billion of its own shares over three years as long as the Salam deal was concluded. The company said that as of October 9, it had purchased 34 million shares for £134 million.

Overall, BAE said trading from July 1 to October 9 had been consistent with its management’s expectations and that the outlook remained unchanged.

But trouble could be brewing in the US where the company has been hit by the US government shut down, having had to send home 1,200 workers in its intelligence and security and support solutions businesses since October 1.

So far BAE says the effect has proved immaterial to its financial performance. But it warned: “Some progressive impact to the group’s US operations would result from a protracted government shutdown.”

For now no compromise agreement is in sight between President Barack Obama and congressional Republicans over how to fund the government.

US contractors and European companies, such as BAE, which have significant exposure to US government contracts — especially in services — are expected to feel the effect.

The Pentagon is continuing to award contracts throughout the shutdown however, reducing the effect, especially on those defence contractors providing equipment, rather than services.

The company expects its share repurchase programme to help overcome the downside of the cuts in US defence spending, predicting double-digit growth in underlying earnings per share is anticipated for 2013.

Longer term however, uncertainty in the US, rather than Saudi Arabia, was of central concern, Stallard said. He noted the US outlook in particular was a concern because it was so difficult for companies to know how much and what would be cut from the Pentagon’s budget.

“We are still concerned about the outlook for BAE’s US business, where we see future revenue pressures and no visibility,” he said.

— Financial Times