A year ago you might have struggled to predict that Dominic Cummings and Rishi Sunak would be in charge of a defence review that could change Britain’s military objectives for a generation or more.
One of them, the prime minister’s very special adviser, marches to his own tune and his well-publicised tour of the country’s most important military establishments is enough to put the chiefs of staff in a tiz.
The unheralded chancellor of the exchequer, meanwhile, will have little or no money in a few months’ time, when the impact of the Covid-19 economic turmoil begins to tot up. In any event, no one believes that anyone at the Ministry of Defence is in charge of defence policy.
What all this means for BAE Systems, the country’s pre-eminent defence company, is anyone’s guess — but engaging with people who either care little about the industrial and military establishment or have an empty bank account is not a good start. Then again, a British defence review is not even its biggest issue.
Of last year’s £18.3 billion of annual revenues, nearly half came from the United States. Ever since BAE tossed away the nation’s sizeable and strategic stake in Airbus, western Europe’s aerospace and defence titan, for a pittance in 2006 — and even more so after Angela Merkel, the German chancellor, blocked merger talks between the two in 2012 — BAE’s focus has been on America.
BAE Systems is the company created from the 1999 merger of British Aerospace, itself a combination of the likes of Vickers-Armstrongs, Hawker Siddeley and Royal Ordnance with the defence parts of Marconi, which included Plessey and the Clyde shipbuilders. Today it employs 87,000 people in 40 countries. About 40 per cent of them, more than 33,000 people, are at 50 sites around the UK.
A parochial view of BAE would see it as the company behind new aircraft carriers, building Type 26 frigates, Astute and Dreadnought submarines and Typhoon aircraft. However, the UK accounts for only about 20 per cent of its £18 billion annual revenues, with the Middle East — mostly Saudi Arabia — another 20 per cent and the US just less than 50 per cent, at £8.6 billion. For that country BAE builds or is developing tanks, armoured troop carriers, amphibious vehicles and howitzers. It is also a main contractor to the US navy for repairs and upgrades and has cybersecurity contracts with the Pentagon.
It is a leader in defence and commercial avionics and electronics, although the latter market is not so good at present. The company’s two biggest recent acquisitions — Collins Aerospace’s satellite positioning systems and Raytheon’s Airborne Tactical Radios, for a combined $2.2 billion — were both in the US.
BAE is exposed to some interesting defence budget decisions in America, especially in light of the elections in November. There were deep defence cuts at the beginning of the last decade as the US evaluated its priorities after the global financial crisis and the wars in Iraq and Afghanistan, but tensions with China and Russia have grown since then.
BAE announces its half-year results next week. Many in the City continue to wonder when the postponed £460 million final dividend for last year will be paid. At a trading update three weeks ago, the company said that it expected profits to be down 15 per cent on flat sales, but indicated that investors should expect a much stronger second half.
As Covid-19 began to grip the West, shares in BAE went from 669p to 438p and have done only a little better since, closing last night at just under 490p — up 3¾p, or 0.8 per cent — valuing the company at £15.75 billion and putting it at less than 12 times this year’s earnings.
Advice Hold
Why Though not without upcoming issues BAE is a long-term, US-focused play
Petropavlosk
It was all going so well for Petropavlovsk (Emily Gosden writes). After a solid 2019, mercifully free of the boardroom coups that dominated previous years, the Russian goldminer enjoyed a strong start to 2020.
Gold prices surged as the pandemic triggered a flight to the “safe haven” metal. Petropavlovsk was producing significantly more of the stuff, too, thanks to a good performance from its prized new “pox hub”, or pressure oxidation plant, one of only two such facilities in Russia. A decade in the making, the site started up in late 2018 and allows the company to process “refractory ore”, which is abundant in Russia but is much harder to process than conventional deposits.
In March, Petropavlovsk was promoted to the FTSE 250, cementing its recovery from the dark days of 2015, when Peter Hambro and Pavel Maslovskiy, its co-founders, led a painful restructuring to stave off collapse. As gold prices continued to rise, by late June the shares were worth more than double their value at the start of the year.
But then another boardroom battle broke out. UGC, a rival Russian producer that became Petropavlovsk’s biggest shareholder this year, capitalised on low turnout at its annual meeting to oust most of the directors, including Mr Maslovskiy, 63, the chief executive. Petropavlovsk descended once more into the kind of corporate turmoil that investors thought they’d seen the back of. The company accuses UGC of trying to gain control by stealth and on the cheap, with the presumed aim of gaining access to the pox hub.
UGC denies acting in concert, but its announcement yesterday that it is further increasing its shareholding by exercising convertible bond rights only adds credence to the idea that it is trying to gain control. A shareholder meeting in the next few weeks will decide whether most of the original directors are reinstated.
It’s an unsavoury mess best avoided by a prospective new investor, but those who already hold the shares should retain them — and exercise their rights to vote for the return of Mr Maslovskiy and his allies, who hold a more credible claim to have their best interests at heart.
Advice Hold
Why Shareholders should vote to bring back ousted CEO
