Defence giant says Glasgow ship contract ‘secures critical industry’
SHARES in BAE Systems rose sharply as it unveiled a £4.2 billion contract for five warships to be built in Glasgow as part of a strong forward order book amid a rise in defence spending internationally.
The Clydeside contract secures shipbuilding at BAE Systems’ facilities in Scotland into the 2030s and supports 1700 jobs in the city, with up to £1.2 billion spent in the UK supply chain.
The Glasgow deal for five more Type 26 frigates was the highest contract figure included in BAE Systems’ update to the City on Tuesday.
Three ships are already under construction in Scotland, including HMS Glasgow which is set to enter the water within weeks,
Charles Woodburn, BAE Systems chief executive, said: “This contract secures a critical UK industry and allows us to build on our long history of shipbuilding on the Clyde as we continue to deliver cutting-edge equipment to the Royal Navy into the next decade.
“It underpins the ongoing investments we’re making in the skills, infrastructure and technologies needed to stay at the forefront of the maritime sector and to support the UK Government’s National Shipbuilding Strategy.”
BAE Systems said it is “tracking towards a very strong year of order intake ... with £18 billion secured in the first half, we have secured a further £10bn since the half-year”.
It said it expects sales to be up between seven to nine per cent for the year with earnings up 10-12%.
“While we continue to work through ongoing supply chain challenges especially in those business areas reliant on microelectronics, the recruitment picture has started to improve since the half year, particularly in electronic systems,” the company said. “Many of the countries in which we operate have either announced increases or are making plans to increase spending to address the elevated threat environment.
“Whilst global economic and fiscal pressures weigh on governments, the commitment to defence in our major markets remains robust.”
Mr Woodburn also said: “Looking forward, our large order backlog, diverse portfolio position and focus on programme performance position us well for another year of top-line growth and margin expansion in 2023.
“We see sales growth coming from all sectors and opportunities to further enhance the medium-term outlook as our customers address the elevated threat environment.”
Sophie Lund-yates, an equity analyst at Hargreaves Lansdown, said: “There are a few things that BAE is beholden to, and one of those is government defence budgets.
“We’ve learned today that many of the countries the defence giant operates in are upping their defence spending in response to the more threatening geopolitical climate. This should feed into a sticky source of revenue for the group.
“New government contracts tend to be long-term in nature, giving BAE exceptional visibility over demand, which is hard to find in today’s uncertain environment.”
Ms Lund-yates pointed to the supply chain issues with which the company has been grappling, particularly in areas of production that rely on microelectronics.
“For now, BAE is able to offset the worst of these issues, operating in a sector with high barriers to entry means margins can enjoy a certain level of protection. However, an extremely protracted bout of disruption could cause pain.”
Olly Anibaba, analyst at Third
Bridge, said: “Our experts expect US and European defence budgets to continue to grow over the next two-five years. The Russia-ukraine conflict is a wake-up call for many European countries.”
Shares in BAE Systems rose more than 3% in early trading and closed at 738.6p, up 12.4p, or 1.71%.