A contract to supply 72 Typhoon jets to Saudi Arabia was agreed in 2007 for a mooted £4.4 billion. It was then the subject of tortuous negotiations as BAE tried for a higher price; these were concluded to everyone’s satisfaction in 2014.
On top of this BAE has a vital rolling contract with the Saudis for support and maintenance on the earlier Tornado and Hawk aircraft it supplied that comes up for review at the end of this year.
Discussions on this, part of the next five-year Saudi British defence co-operation programme, are progressing and it will almost certainly be extended for another five years. Evidence suggests a value of £5 billion on the programme.
The company gets about a fifth of revenues from the Saudis and about the same amount of profits, though this may have been falling as the client strikes tougher bargains. Typhoons account for about a third of all sales across the group.
The support contract is lumped in with BAE’s platforms and services international division. The company also takes profits within its platforms and services UK division from aircraft assembled at Wharton, Lancashire, and delivered to clients — 64 of those 72 Saudi aircraft are through but the others will provide further uplift.
Those details are about all the outside world knows about BAE and the Saudis; the rest will be locked away somewhere in Whitehall. The next milestone will be the award of another 48 Typhoons to the Saudis for perhaps £4 billion or more and 12 to Bahrain. Some think this could be as far off as 2018.
It will, then, have no effect on 2016 earnings, which BAE confirmed yesterday would be up by between 5 and 10 per cent. The shares, off a penny at 537p, were beneficiaries of the post-Brexit sterling drop but have been falling since the row over Saudi involvement in the Yemen civil war and the alleged use of Typhoons and other BAE weapons blew up.
It seems almost inconceivable that the government will suspend arms shipments to Saudi Arabia, but I am not convinced this is the key to future performance anyway, given build-up in the UK and US. BAE shares sell on 13 times’ earnings and I would buy on prospects elsewhere.
My advice Buy
Why Future prospects for Saudi orders are hard to quantify, but BAE would seem to have plenty of other work feeding through elsewhere
DFS Furniture
Results figures are inevitably backwards facing, but none less so for companies such as DFS Furniture reporting a financial year ending on July 30, just as the effects of the referendum started to be felt. The company is an odd one in that it floated in March 2015 to rearrange debt and to allow private equity an exit and has made one special dividend payment since with another promised — hardly usual for recent floats.
This reflects the cash generation of the retailer. The results were excellent but the concerns were over how DFS navigates the lower pound and the higher cost of imports. The reassurance is that while the hit will come in the current financial year, it will be mitigated by actions being taken and the loss to the bottom line will be limited to about £4 million.
This would allow that payment to go ahead, though the company will wait until the important winter selling season to quantify it. The shares, off 4¾p at 273¼p, are above the 255p float price again, they sell on less than 12 times’ earnings, and a 4 per cent dividend yield provides support even ahead of any further special payment.
My advice Buy
Why Multiple is fair, ahead of future investor returns
BTG
BTG, the specialist pharmaceuticals company, does not trouble the market often, but yesterday there were two statements, a steady-as-she-goes trading update and the news that the company has settled a troubling legacy dispute with the US Department of Justice.
To take these out of turn, the settlement will require a payment of $36 million, not hugely significant. BTG shares were up on the update, ending 37p higher at 684p as the company indicated the blindingly obvious, that with a tiny percentage of sales in the UK, currency factors would mean it would overshoot earlier revenue guidance of £510 million to £540 million in the financial year to March 2017. The effect on the bottom line would be more muted because of hedging, so the benefits will come next year.
BTG has added to its oncology products from the acquisition this summer, for a bit short of £60 million, of Galil Medical, which makes treatments for kidney cancer. The appeal of the company is that its speciality drugs side, existing and proven treatments, provides cash to pay for such diversification.
It has underperformed before on Varithena, a treatment for varicose veins that is taking time to get established in the US. An emphysema treatment, PneumRx, is grinding through various regulatory processes in France and Germany. I have suggested before that investment in BTG requires looking several years ahead. On 36 times’ earnings, I would wait for a further period of price weakness to buy.
My advice Avoid
Why Long-term picture is good but multiple looks high
And finally
Ironveld is a mining tiddler and a new one on me, but it is one of the vehicles of industry veteran Giles Clarke and is attracting interest on investment bulletin boards. The company, as the name suggests, is developing an iron mine in South Africa and has been granted $17.9 million of state aid towards this. Ironveld aims to use its products to feed a smelter. There are offtake agreements signed now for all three products and the shares were up sharply. Further funding is needed; as ever with such stocks, proceed with some caution.
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