Morning Note: Market news and an update from BAE Systems.

Market News

US equity markets were fairly flat last night – S&P 500 (unchanged), Nasdaq (-0.2%). Arm Holdings fell by 9% after hours after the semiconductor company gave a lukewarm revenue forecast for the fiscal year, raising concerns that the tech AI spending spree is slowing.

This morning in Asia, stocks were mixed – Nikkei 225 (-0.3%); Hang Seng (+1.1%); Shanghai Composite (+0.8%) – on the back of upbeat trade data in China and fresh signs of property support. The FTSE 100 is currently little changed at 8,359. Companies trading ex-dividend today include HSBC (3.47%), Admiral Group (1.90%), and Vonovia (3.20%).

The US Federal Reserve’s Susan Collins cautioned reaching the Fed’s 2% inflation goal may take longer than previously thought, without indicating when rate cuts might happen. The 10-year Treasury yield hovered around 4.50%, while gold drifted to $2,310 an ounce.

The Bank of England is expected to keep its key rate at 5.25% though Andrew Bailey may deliver a stronger signal on when the central bank can loosen policy. UK home sellers are rushing to put property on the market after prices dip, with a RICS survey showing the stock of homes for sale at a three-year high. Meanwhile, buyer demand has slipped back after the rise in mortgage rates. Sterling trades at $1.2475 and €1.1621.

The oil price moved up to $83.80 a barrel. OPEC+ is expected to extend production cuts when members meet on 1 June, Goldman said.

Source: Bloomberg

Company News

BAE Systems has this morning announced that trading so far this year has been in line with expectations and operational performance continues to be strong. Guidance for the full year has been reiterated and, in response, the shares are little changed in early trading.

BAE Systems is global supplier of advanced, technology-led defence, aerospace, and security solutions. The company generated £25bn of sales in 2023 from five divisions: electronic systems, platforms & services, air, maritime, and cyber & intelligence. The order backlog stood at almost £70bn. Many of the group’s contracts will be executed over many years providing long-term visibility over top-line growth.

At a time of heighten geopolitical risk, BAE is exposed to structurally growing defence markets. With an international presence and diverse portfolio of products and services, the group is well placed to compete. The recent passing of the US supplemental aid package to Ukraine and the commitment by the UK Government to spend 2.5% of GDP by 2030 should build further positive momentum.

In today’s update, the group has confirmed its 2024 guidance issued at the time of its results in February: sales growth up 10%-12%, underlying operating profit up 11%-13%, underlying EPS growth up 6%-8%, and free cash flow generation of more than £1.3bn and cumulative FCF generation of more than £5bn in the three years to end 2026.

Capital expenditure is expected to rise compared to 2023, with spend focused on maritime, munitions and the group’s Swedish combat vehicle production capacity and capabilities. These investments are all included within the rolling 3-year cash guidance.

The group’s order activity remains positive. In March, BAE won a large contract to build Australia’s new fleet of nuclear-powered submarines, the latest significant development in the AUKUS trilateral security pact between the US, the UK, and Australia. In addition, other business includes a $754m award for a second full rate production order of Armoured Multi-Purpose Vehicles, awards for upgrades and maintenance services of the CV90 Denmark collectively amounting to over $650m, and technical and sustainment support of up to $318m for M109 Self-Propelled Howitzers.

In February, the group completed the £4.4bn acquisition of Ball Aerospace, a leading provider of spacecraft, mission payloads, and optical, and antenna systems. The business has been renamed Space & Mission Systems and the integration programme is underway. The business has had a good start to the year, securing a number of key contracts.

The group is financially robust – net debt was £1.0bn at the end of 2023 (i.e. pre the closure of the Ball deal). It is currently 90% of the way through a £1.5bn share buyback programme and has authorised another programme for the same amount to run over the next three years. This is in addition to a growing dividend – the 2023 payout was increased by 11%.

Source: Bloomberg