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MARKET COMMENT
BAE Systems Dives

By David Kuo (TMFDragon)
January 10, 2001

Carburton Street, London BAE Systems (LSE: BA.) updated the market on trading conditions this morning.

It was a very mixed bag with considerably more bad news than good for the company. The shares slumped 25% as a result. The British defence and aerospace firm, one of Europe's largest weapons makers, is now worth 8.5b, a far cry from the 16.4b it commanded back in 1999.

BAE Systems has been forced to make provisions to the tune of 300m as a result of extra costs associated with the 2b Nimrod development and production contract. The actual cost of delivering the planes to the UK Ministry of Defence is now expected to exceed the initial contract value. The silver lining to this grim-looking cloud is that the support contract for the planes could double the size of the programme and eventually generate good returns.

A further 110m of exceptional charge has been made to the accounts in the year 2000 and 115m in 2001 as a consequence of the shortfall in orders for Hawk aircrafts. The exceptional charge will also cover lower orders for Tornado and Eurofighter Typhoon production.

On a brighter note, the restructured BAE Systems, which was formed from the merger of British Aerospace and the defence business of Marconi (LSE: MONI), is benefiting from the resulting synergies. Savings to the tune of 100m have been realised for 2000 and a further 275m in 2002. Furthermore, the acquisition of the Control Systems business and AES electronics warfare business from Lockheed Martin is also starting to bear fruit.

As a major weapons maker, BAE's business will thrive in times of unrest and wars. Thankfully for many of us, the threat of conflict around the globe has to some extent lessened, but this is unlikely to benefit companies like BAE in its present guise. BAE's 20% stake in Airbus Industrie, the makers of commercial wide-bodied jets, has helped to balance out some of the pain that the company is experiencing in its defence business. The company could perhaps learn from this experience and shift more resources into its commercial operations and place less reliance on defence contracts.

Where Next?

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