Coming in to land, £4bn Saudi order for BAE’s Typhoon jets
BAE Systems will soon land a longawaited order for Typhoon jet fighters, according to a briefing by Berenberg which sent the defence giant’s shares soaring.
Saudi Arabia will sign a £4bn deal for 48 of the aircraft within the next six months, analysts said in a bold call that is part of a wide-ranging note on the blue-chip company.
“Saudi Arabia is fighting a war in Yemen and the utilisation rate of its Typhoon and Tornado fighters points to an order,” said Berenberg analyst Charlotte Keyworth. “There are also a lot of other indicators, such as moves to a renewal of BAE’s five-year support contract for Saudi and a ramping up of its activity there.
“If you look at the macro picture, there are other indicators. The opening up of Iran – a historic adversary of Saudi – has heightened tensions in the region, the change of leadership in Saudi and its purchases of weapons from Lockheed-Martin. It all points to Saudi adding to its military capabilities.”
There has long been speculation over whether BAE will land further deals to supply the Typhoon, with a lull in orders for the supersonic jet broken only by Kuwait agreeing last year to buy 28. While interest in the Typhoon has been muted – causing the BAE to cut nearly 400 jobs in November as it slowed production rates at its assembly line in Warton, Lancs, to keep the plant running – France’s rival Rafale jet has secured several contracts.
BAE has been tightlipped about negotiations with Saudi Arabia, but Ms Keyworth said the company was in “advanced discussions” with leaders from the Gulf nation. However, she cautioned: “We just don’t know what the cash profile of the orders will be. It’s a very opaque procurement process and it’s hard to say exactly when things will happen with any confidence.”
Berenberg did predict that an order from Saudi Arabia could result in a 15pc advance prepayment, “implying an inflow of £400m to £500m by 2017, reducing BAE’s net debt to an estimated £1.1bn”. Upgrading their stance on BAE from “hold” to “buy”, Berenberg’s analysts also pointed to other contracts over the next six months they believe will deliver a boost of between 10pc and 20pc to BAE’s £36.6bn order book.
These include the Saudi support contract – which could be worth £7bn over five years – £1bn of work on Britain’s Trident submarine replacement, and a potential £550m order from India for M777 howitzers.
Berenberg also questioned respected stock picker Neil Woodford’s decision to dump his holding in BAE, announcing this week that worries about the company’s £2.6bn pension deficit had driven the decision.
Ms Keyworth said the defence group paid £300m a year to the pension scheme, but added: “We believe the recovery plan of contributions to make up the shortfall will be increased from nine years to 12, ‘smoothing’ it out.”
The forecasts drove BAE shares up more than 2pc to 540½p yesterday. A spokesman for BAE said: “It would be inappropriate to speculate on the future requirements of individual customers.”