Unsurprisingly, the BAE Systems [BAE.L] share price benefitted from security concerns in early 2022. However, the acceleration seen in the first half of the year has started to slow. As BAE’s stock approaches analyst price targets, investors might be wondering just how much upside is left.
Fundamentally the UK defence giant's business looks in robust shape and the stock is still gaining. Over the past month, BAE’s share price is up 4.6%, closing Friday 15 July at 792.6p. That’s nothing to be sniffed at, yet it is a slowdown in a stock that has gained 44.2% in the past six months.
Aside from geopolitical events, other potential tailwinds for BAE include the decision to sell its financial security business and the continued development of long-term contracts.
BAE sells NetReveal to SymphonyAI
BAE Systems is selling its financial crime detection business NetReveal to SymphonyAI, the artificial intelligence company owned by billionaire Romesh Wadhwani. The terms of the deal aren’t known but in an interview with Bloomberg SymphonyAI chief executive Sanjay Dhawan hinted that it was his company’s biggest to date.
NetReveal is part of BAE’s financial crime business. This area underwent a restructure in 2020 and BAE has said this “significantly improved profitability” in its 2021 annual report. This has been boosted by winning large accounts in North America and Europe.
Arguably, NetReveal sits awkwardly in BAE’s portfolio. After all, most people don’t immediately think about financial crime when it comes to a defence contractor better known for heavy duty military hardware.
Yet, with cybersecurity becoming more of a concern, BAE has expanded its wider cyber and intelligence division, which could prove to be a long-term cash generator.
In 2021, the division made up 5% of BAE’s overall sales, pulling in £1.7bn, with an underlying EBIT of £156m. Its order backlog was £1.6bn, down from £1.7bn in 2020. Governments made up the bulk of customers, with commercial clients accounting for 13% of the cybersecurity haul. BAE expects sales in this area to grow between 3% and 5% in 2022.
Selling NetReveal to SymphonyAI could both streamline BAE’s cybersecurity proposition and net some money that can be reinvested in more profitable areas of the business.
BAE delivers M-Code GPS to Germany
At the same time that BAE is slimming down its financial crime business, it is making progress in selling its GPS capabilities.
The company delivered its advanced M-Code GPS product to Germany earlier in July. Germany is the first country to receive the product via the foreign military sales process, which provides precise geolocation and position capabilities for ground-based soldiers and vehicles.
Greg Wild, director of navigation and sensor systems at BAE Systems, said that accelerating the delivery of M-Code capabilities was essential in dealing with the threats facing allied countries.
M-Code is a highly encrypted, secure military GPS signal that enables communication on the battlefield. The US Congress has mandated all Department of Defense systems use M-Code for new procurements, which include GPS requirements.
BAE is one of the few companies delivering this technology to the US military. To strengthen its position, it purchased the Collins Aerospace Military Global Positioning System business from Raytheon Technologies [RTX] for £1.9bn in 2020. BAE has said that its military GPS business has a production horizon of five to 10 years and was well positioned to capture follow-on work with the M-Code transition.
BAE to update the market in July
BAE will be announcing half year results on 28 July. Debt will be the key thing to watch out for when BAE updates the market. In 2021, debt came in at £2.16bn, down £558m from the previous year. Another area to keep tabs on is BAE’s order backlog. At the end of 2021 this stood at £44bn, down £1.2bn.
As a business, BAE has a deep moat and its long-term contacts, like M-Code GPS, should ensure revenue keeps flowing in. However, BAE’s share price growth might be steady from this point on, rather than the acceleration seen earlier in the year — and the sale of NetReveal is unlikely to change this.
Of the 17 analysts polled by Refinitiv, BAE share price carries a median 830p target, representing a 4.7% upside on Friday’s close. For income seekers, the company upped its dividend payout 6% to 25.1p a share in 2021.
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