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BAE to halve pension deficit with £1bn injection


BAE Systems is taking steps to more than halve the deficit of its £20bn pension fund with a £1bn injection as it forecasts further growth in earnings and cash this year on the back of a strong order book.

The UK defence company on Thursday said it would borrow to accelerate pension payments as part of its plan to clear the £1.9bn deficit five years early, by the end of 2021.

A £1bn injection would be made in the coming months, helping to lighten a burden that for years has weighed down on its shares and constrained the group’s ability to deploy cash.

Two further payments would be made this year and next amounting to £490m. With 108,000 members, BAE Systems runs one of the largest pension schemes in the FTSE 100.

The announcement helped the shares edge up 2.3 per cent to 654.8p in midday trading and came as BAE posted a 5 per cent rise in annual underlying earnings before interest and tax to £2.1bn, on a constant currency basis.

Charles Woodburn, chief executive, said the pension payment, along with other steps taken during the year would “help to accelerate our strategy and further our growth outlook. It provides clarity and certainty for us going forward.”

The company is forecasting a sharp rise in free cash flow for this year, up from £850m in 2019 to £1bn in 2020, as well as a mid-single digit rise in earnings.

The steps to address the deficit, coming on the heels of last month’s deal to pay $1.93bn for the military global positioning business of US engineer Collins Aerospace, were welcomed by analysts and pension experts.

Sandy Morris, defence analyst at Jefferies who has had BAE shares rated as a “hold” since 2016, said the pension deficit had been a “long-running sore and distraction”. But with the accelerated payments, there was “renewed life at BAE . . . The equity story may be stirring”.

Nick Cunningham of Agency Partners said the injection would take net debt up to £1.8bn, while acquisitions were still to be included. “But it ends the pension top-up payments early, with last payment in 2021,” he said. The group’s “recent actions gives a sense of management acting proactively to increase the value of group”.

Pensions experts warned that even with the injection, underlying liabilities would continue to present a challenge.

“BAE is doing the right thing by reducing the recovery period, with a £1bn one-off contribution now, plus £0.25bn in each of 2020 and 2021,” said John Ralfe, an independent pension consultant.

“But its total underlying pension liabilities, including the US, are almost £30bn, much larger than its market cap and pensions remain a big issue for BAE.

“And, unlike other companies with large pension liabilities, such as BA or BT, BAE has not closed its defined benefit scheme to existing members, so its pension liabilities will continue to increase.”

BAE also gave a three-year guidance for free cash of £3.5bn to £3.8bn, which does not include the GPS business, BAE’s biggest acquisition in a decade. Analysts are expecting the targets could be revised once that deal is completed next year.

The group’s numbers revealed a stronger than expected performance in its air and maritime divisions in 2019, and BAE said its future guidance was supported by an expected increase to full production rate of the F-35.

The Lockheed Martin fighter is one of the most advanced jets in the world, and the most costly, but equally has been fraught with technical problems. Yet it has been a strong revenue generator for BAE, which has roughly 10 per cent of the work on the programme by value.

Mr Woodburn said discussions continued with potential new partners on the UK’s Team Tempest combat air programme after Italy and Sweden last year joined the next-generation combat air capability.

Overall, revenue increased 7 per cent to £1.7bn, excluding the impact of currency translation. Reported operating profit rose from £1.6bn to £1.9bn.

Net debt decreased from £904m to £743m. Peter Lynas, finance director, said that after both the acquisitions and the pension injection, net debt would represent two times earnings before interest tax, depreciation and amortisation. The group announced orders of £18.4bn during the year, putting the backlog at £45.4bn.

Basic earnings per share increased 48 per cent to 46.4p. The final dividend of 13.8p gives a total of 23.2p per share, up 4.5 per cent.



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