BAE Systems bowed to the inevitable in November and accepted that the order for 48 more Eurofighter Typhoons from Saudi Arabia would not materialise that year. This was a follow-on from the 72 ordered in 2007, and the desert kingdom accounts for about a fifth of all BAE sales.
Typhoon production was slowed down, and BAE said that revenue from the programme would fall from about £1.3 billion last year to £1.1 billion this year. There was not a lot more being said about the order yesterday, as BAE announced figures for 2015. The deal should go ahead eventually, the geopolitical situation being what it is, but the low oil price is understandably delaying decisions.
The consortium, including BAE, that makes the Typhoon is also awaiting finalisation of the purchase of 28 of the fighters from Kuwait, worth $8 billion in all. Likewise, this will emerge eventually.
BAE is in a bit of a fallow period. The cyber and intelligence business, intended to lessen the reliance on US defence, is not yet big enough to move the dial and is soaking up investment. Defence generally is emerging from its austerity-imposed hiatus, with the US budget caps lifted for the fiscal years 2016 and 2017. BAE supplies electronics equipment to the F-35 fighter, for example.
In the UK, the strategic defence and security review in November set out increased spending plans over the next decade. BAE reported free cashflow of about £400 million last year and expects much the same for this year, while analysts reckon that, as payments feed through from developing programmes, such as the supply of Typhoons to Oman, cashflow could rise to £1 billion next year.
Last year’s figures benefited from continuing shipments of Typhoons to the Saudis under the earlier deal, 12 as opposed to 11 in 2014, work on the European programme and increased naval business. Against this, earnings were hit by that Typhoon slowdown and writedowns on its Australian shipyard.
BAE is one of those cases where investors are being paid to wait.
The shares, up 5¾p at 505p, trade on 13 times earnings, with a dividend yield of 4.2 per cent. Worth it for that income and future growth.
Sales £17.9bn
Dividends 20.9p
£400m Expected free cashflow for 2016
MY ADVICE Buy long term
WHY The company is in a fallow period, with revenues and earnings from defence set to flow through, but the yield is attractive for now
Shares in Indivior have been a disappointing market since the summer, after the demerger from Reckitt Benckiser at the start of 2015. The pharmaceuticals company has only one product on the market, a treatment for opioid addiction in the United States. The next entirely new compound, for schizophrenia, is not scheduled to arrive until 2018.
That opioid compound, Suboxone, is facing generic competition, and Indivior is involved in legal action against six rival producers. An overdose rescue product failed to gain approval in November and, with another company already having entered that market, has been abandoned.
The entire pharmaceuticals sector has been under the cosh because of fears of a crackdown on pricing if Hillary Clinton becomes president.
Finally, Indivior is axing dividend payments after paying out 40 per cent of earnings in its first year. I did suggest selling Indivior at the start of the year. Though the company is confident enough of that one product to forecast for 2016, the shares, up 23½p at 171¼p, are still best left to professional investors given all the above uncertainties.
Revenue $1.0bn
Dividends 12.7c
MY ADVICE Avoid
WHY No dividend, and uncertainty over patents
The insurance market is not getting any better for insurers such as Lancashire Holdings. As I have suggested before, the lack of income elsewhere is sucking in capital, which is forcing down premium rates in a continuing chase to the bottom.
There are two ways of reacting to this. You can head into modish but largely unproven forms of insurance, such as cybercrime, or you can exercise extreme discipline and not chase unprofitable business. Lancashire prefers the latter course, and to return all excess capital to its investors. A special dividend of 95 cents has just been paid, and the assumption is that a further payment will arrive later this year if there is not a sudden deterioration in the markets, such as a resumption of high losses from catastrophes.
For 2015, underlying gross premiums written fell by 12.5 per cent, partly because of falling rates and partly because clients in the energy sector, for example, were less active and needed less insurance. The combined operating ratio, the difference between money out and money in, was 72 per cent for the year, a reflection of that underwriting discipline — in the fourth quarter it fell to 67 per cent.
Some in the market worry that Lancashire is shrinking the business too far and too fast. Investors will be more interested in that return of capital. Lancashire has returned more than $2.5 billion since 2005, and last year’s payments suggest a historical yield of 12 per cent. The shares fell 12p to 617p. Worth it for that income alone, though some also wonder if the company will succumb to the M&A sweeping the sector.
Underlying fall in premiums 12.5%
MY ADVICE Buy long term
WHY Yield from recycling of excess capital
And finally...
Victoria Oil & Gas is an AIM tiddler that is a little different from the usual exploration crowd. The company produces gas in Cameroon, which is supplied on fixed contracts, including one with the government. This means that it gets the equivalent of $60 a barrel and is largely immune to the global oil price fall. The shares added 8 per cent on news that Victoria has agreed to buy and develop Glencore’s 75 per cent interest in a block next door to its existing field, and one that is significantly larger by area.
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