BAE Systems, Europe’s biggest defence company, lifted 2008 earnings expectations on Friday as it beat first-half forecasts, boosted by strong demand for armoured vehicles for war zones in Iraq and Afghanistan. The British firm said earnings before interest, tax and amortisation (EBITA) leapt 26% to £881m ($1.75bn) in the six months to 30 June.

Excluding a £61m profit on the disposal of its surveillance and attack business, this beat analysts’ average forecast of £796m, according to a company poll.

However, a 12% rise in sales to £7.75bn was below some analysts’ forecasts, held back by a 19% drop in sales at the firm’s programmes & support business due to a transition on its Typhoon fighter jets programme.

Chief executive Mike Turner, who will be succeeded by chief operating officer Ian King next month, said demand was driven by a 29.5% rise in sales, excluding acquisitions, of armoured cars – particularly mine-resistant ambush-protected (MRAP) vehicles.

“We have a lot of long-term business in that sector, but clearly we are benefiting from current operations in Iraq and Afghanistan,” he told reporters.

BAE, the world’s third-biggest defence company, said its order book stood at a record £41.1bn, up from £31.7bn the same time last year, and finance director George Rose expected analysts to lift their 2008 profit forecasts.

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Analysts are currently forecasting BAE to report full-year EBITA of £1.76bn, according to a company poll.

Morgan Stanley analysts said BAE shares looked attractive versus their US peers, trading at 12.1 times forecast earnings against a US sector average of 14.8 times.

“[But] the lacklustre top-line performance coupled with the overhang of the DoJ (US Department of Justice) investigation is likely to somewhat offset the increased guidance,” they said, keeping an ‘equal-weight’ rating on BAE shares.


BAE is being investigated in the United States over corruption allegations stemming from a Saudi arms deal in the 1980s. A similar investigation in Britain was halted on fears that Saudi Arabia might stop sharing anti-terrorism intelligence if the probe continued. BAE has always denied any wrongdoing.

At 08.55 GMT, BAE shares were up 0.8% at 453.75p, outperforming a 0.6% fall on the UK’s FTSE-100 index of leading shares and valuing the company at about #163;16bn.

Turner said BAE was looking to expand its six so-called ‘home markets’ of Australia, Britain, Saudi Arabia, South Africa, Sweden and the United States, with a particular focus on India, and South Korea and Japan.

“We see those three in particular as markets we’d like to add to our home market list,” he said on a conference call.

Turner was also relaxed about the prospects for US defence spending under either US presidential hopeful John McCain or Barack Obama.

“The US, whether it’s McCain or Obama, is determined to maintain national security (and) its role in the world. Defence spending will stay at very, very high levels.”

BAE, which also makes howitzers, bridge-laying vehicles and self-propelled artillery, proposed an interim dividend of 5.8p a share, up from 5p the same time last year.

By Mark Potter