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Could BAE’s share price rally as arms maker looks to India for growth?

Defence giant BAE Systems [BA] is in talks to play a part in the development of India’s new aircraft carrier, the company confirmed to industry newswire Jane’s 360, as the defence ministries of India and the UK earlier this week signed a memorandum for closer collaboration on military procurement.

New pipelines from India’s defence sector – which was highlighted by BAE as the second-biggest accessible market after the US’s – could prove valuable to the company. This comes at a time when uncertainty around EU-UK defence cooperation post-Brexit and a backlash over Britain’s status as an arms supplier to Saudi Arabia raise business risk in what have traditionally been its main markets.BAE 1-year share price performance, CMC Markets, 18 April 2019

 

BAE’s stock plummeted more than 10% to 464p in the week of 18 February, as the company warned of a fallout from Germany’s moratorium on weapon deliveries to Saudi Arabia, imposed late last year in response to the regime’s role in the Yemen conflict and the murder of journalist Jamal Khashoggi. BAE is part of Eurofighter GmbH, the Bavaria-based company coordinating production of the Eurofighter Typhoon jet, for which Saudi Arabia is a major customer.

10%

The amount BAE's stock dropped w/c 18 February

 

What's next?

The embargo on Saudi-bound arms order – now set to last until September – is also impacting the like of Airbus, meaning that France could join the UK in pressuring the German government to relax restrictions, salvaging BAE’s business prospects in the Gulf country. 

However, despite a strong 12% rebound to 510p since 26 March’s low of 454p, the share price is still well below its year-to-date high of 527p in mid-February, as investors’ fear over sanctions and, possibly, over a diminished clout for the UK’s military sector post-Brexit, fail to subside. Chairman Roger Carr has downplayed the risk that Brexit poses to BAE’s supply chain. But UBS, downgrading the stock in December, said Brexit would “inevitably” impact government’s defence budget, and its con-tractors in turn.

 

Market cap£15.88bn
PE ratio (TTM)15.91
EPS (TTM)31.20
Quarterly earnings growth (YoY)105.00%

BAE systems stock vitals, Yahoo finance, 18 April 2019

 

A pivot to naval procurement in India – a democratic ally looking to augment its military capabilities – may well be one of BAE’s best bets for diversification. The company had already signalled an interest in India’s market at an event in New Delhi last week, when chief procurement officer Paul Smith said that, “to identify and work with greater numbers of qualified and capable Indian suppliers” would be one of his “strategic imperatives” for 2019. And the focus on sea-based military projects may lift margins at BAE’s naval division, which has proven the laggard among the company’s business lines.

Shareholders will also find relief in the company’s still-strong ability to attract collaboration from EU peers: in January, a joint venture with Germany’s Rheinmetall was set up to develop the British Army’s future Mechanised Infantry Vehicle. The personnel carrier will be produced on British shores, at BAE’s facility in Telford.

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