Yesterday on July 01-19, the two large defence groups by market capitalisation, of the UK and Germany, announced their joint venture agreement for military vehicle, manufacture and support. The joint venture between UK’s BAE Systems Germany’s Rheinmetall – known as Rheinmetall BAE System Land (RBSL) and headquartered in Telford, West Midlands.
The announced joint venture would be going to have a crucial role in the manufacturing of the British Army’s Mechanised Infantry Vehicle (MIV) “Boxer 8×8” and in the development of the other weaponized military vehicle programmes. Also, RBSL would extend support to the British Army’s in-service bridging and armoured combat vehicles.
BAE System Plc
A vital constituent of the FTSE 100 index and listed on the UK’s bourse, the BAE System Plc is an aerospace and defence group company. Their advanced defence technologies safeguard the nation’s security, people and keep censorious information and infrastructure secure. As per the latest annual report recorded by the group for the financial year 2018, the group has a workforce size of 85,800 people in more than 40 countries. The defence group work closely with the domestic groups to support economic development and interchanging knowledge, skill and technology. The group is a major player in its principal markets like the United States, UK, the Kingdom of Saudi Arabia and Australia and hold a significant position in a number of other international markets. The group is headquartered in London, the UK and the outstanding market capitalisation of the BAE System Plc of £15.835 bn ranks it among the large-cap companies listed on the London Stock Exchange. And, its shares are the essential constituent of FTSE 100 Index, FTSE All-Share and FTSE 350 High Yield indices.
Recently announced joint venture (RBSL) would going to be Europe’s elephantine military vehicle group and under the terms and conditions specified earlier in January 2019, the BAE System has sold a 55% of its holding to the Rheinmetall for a consideration of £28.6 mn and this move would preserve 450 jobs across Britain and well placed to drive future growth.
Penny Mordaunt, Defence Secretary commented, and I am quoting, “This move reflects a clear vote of confidence in Britain’s defence sector as global-player in designing, supplying, and supporting military vehicles.”
The newly formed JV would draw on Germany headquartered Rheinmetall’s comprehensive military vehicle technologies along with the other capabilities and systems brought to the RBSL by BAE’s Land UL business, i.e. Trojan, Terrier, Warrior, military bridging and AS90 artillery systems. The announced joint venture is carrying the potential to stimulate the UK’s job market.
Both the group consensually appointed Mr Peter Hardisty as managing director of the newly formed joint venture. Peter was earlier with Rheinmetall UK. Mr Peter commented that our workforces in the Telford, Bristol, and Washington have incredible skills, expertise and hard-earned extensive experience in combat vehicle engineering.
The newly organised team that would drive future growth of RBSL also comprises Carrie White as Finance Director, and Phil Simon as Operations Director, both of them have switched from BAE System.
Rheinmetall Defence is one of the globally renowned manufacturers of military combat vehicles and systems. The group already has a presence in the United Kingdom through Rheinmetall Defence UK and Rheinmetall MAN Military Vehicles UK. Both of these companies are a pro-long supplier to the UK MoD (ministry of defence) and also aid in a number of areas, i.e. vehicle system, ammunition and technical support.
Financial Highlights: BAE System Plc (FY18)
Source: Company filings
Revenue from operation as per IFRS reporting decreased to £16.8 bn against revenue of £17.24 bn, on account of the reduction in Typhoon production activity. Order intake surged by £8.0 bn to £28.3 bn during FY18 as compared with the order intake of £20.2 bn during FY17. Order intake from Electronic Segment surged by 10.75% to 4.6 bn, order intake from Cyber & Intelligence segment witnessed a decline of 3.06% and stood at £1.8 bn, order intake from Platform & Services surged by 4.26% to £3.6 bn, order intake from Air segment increased by 142.2% to £14.9 bn and order intake from Maritime plunged by 24.79% to £3.5 bn respectively. Underlying EBITA for FY18 declined by 2.3% to £1,928 mn, and after deducting a non-recurring item of £154 mn, group’s EBITA stood at £1,774 mn as compared with the EBITA of £1,961 mn during FY17. EBITA was mainly impacted by exchange translation cost of £34mn and by a non-recurring item of £154 mn respectively.
However, operating profit for FY18 improved significantly to £1,605 mn as compared with the operating profit of £1,419 mn during FY17, on account of a steep decline in the impairment costs from £384 mn in FY17 to £33 mn in FY18. In FY18, the finance costs decreased to £609 mn as compared with £762 mn during FY17 and witnessed a decline of 20% on a year-on-year basis. Profit before tax surged by 14.0% to £1,224 mn as compared with £1,073 mn during FY17. Net profit attributable to shareholders stood at £1,000 mn as compared with £827 mn during FY17. Basic earnings per share surged by 5.3 pence or 20.38% to 31.3 pence. For FY18, dividend per share increased to £22.2 pence against the dividend of 21.8 pence during FY17 and witnessed an increase of 2%.
Price chart – 1 Yr
Daily price chart (as on July 02, 2019), before the market close. (Source: Thomson Reuters)
At the time of writing (as on July 02, 2019 at 11:33 AM GMT), shares of the BA were quoting at GBX 495.20 and surged marginally against the previous day’s closing price. The outstanding market capitalisation of the group stood at £15.89 bn and a key constituent of the FTSE 100 Index. At the current trading level, as quoted in the price chart, the dividend yield of the company was quoting at 4.49%, which is broadly in line with the dividend yield of the FTSE 100 index.
52w H/L range
In the year-ago period, shares of the BA have registered a 52w high of GBX 680.6 and a 52w low of GBX 439.4, and at the current trading level, its shares were quoting approximately 27.36 per cent below the 52w high price level and around 12.52 per cent above the 52w low price level, respectively.
From the volume standpoint, the 5-day average daily volume in the stock, traded on the London Stock Exchange was at 6,390,548.80 as compared with the 30-day average daily volume of 7,500,169.67 at the LSE. The 5-day daily average volume was approximately 15% below the 30-day average daily volume traded on the LSE. In today’s session (before the market close), volume stood at 5,650,850 respectively.
Simple Moving Average (SMA)
From the SMA standpoint, shares of BA were quoting above its 30-day and 60-day SMA prices but trading marginally below the 200-day SMA price level. Despite a decent rally in the stock in the past couple of weeks, the stock was still hovering below its 200-day price level. Therefore, a 200-day SMA price of GBX 503.8 would be a crucial resistance level for the stock, and if it is managed to breach its crucial resistance, the stock will enter in the long-term uptrend zone.
Price Performance (%)
The stock has witnessed decent rally in the past couple of weeks, as in the past one month, the stock has surged by approximately 9.28 per cent, and on a year-to-date basis, the stock was up by 7.67 per cent. Although, on a YoY basis, shares of BA have delivered a negative price return of approximately 24 per cent.
Relative Strength Index (RSI)
From the RSI standpoint, the 30-day, 14-day and 9-day RSI of the stock was oscillating between 57-68, which is strengthening the upside movement in the stock in the near term.
52w PE range
In the year-ago period, shares of the BA have registered a 52w high PE of 27.8x and a 52w low PE of 14.15x, however steep plunge over the past one year could be a reason that the current PE of the stock was hovering near its 52w Low PE and quoting at 15.9x. Also, from the TTM PE standpoint, the stock was trading considerably at a lower valuation against the industry average of 54.04x.
At the current trading level, 20-day SMA price of the stock was at GBX 485.8, and upper and lower Bollinger Bands® were quoting at GBX 502.6 (UB) and GBX 468.9 (LB). Therefore, at the current trading level, the stock was trending towards the upper Bollinger Band® and carrying the potential to move up further from the current trading level and also RSI level is strengthening the upside movement in the stock.
Therefore, the above discussed measures indicate that the overall scenario in the stock seems to be positive and carrying the potential to surge further from the current trading level. Also, the dividend yield of the stock is very decent, which is a useful metrics for the income investors.