BAE Systems PLC

BAE's International Financial Reporting Standard (IFRS)-defined order book is large at £36.3 billion (almost double 2020 group revenue) offering good growth visibility. We expect that BAE's core business divisions should perform as follows: Electronic Systems (ES): divisional revenue was up 3.2% in 2020, and we expect a slightly higher growth rate of 4%-6% in 2021. We expect EBITDA margins and divisional cash flows will stay robust. Platforms&Services (U.S.): divisional revenue growth of 5.5% in 2020, with some margin compression due to the impact of the pandemic, specifically in shipbuilding. Management has guided that revenue will contact slightly through 2021, turning positive in 2022, but that margins are already recovering and should be at historical levels again in 2021

...Despite the pandemic, BAE Systems PLC exhibited positive topline growth across all five of its core divisions in 2020, and we expect this trend to broadly continue through 2022. Many defense players fared well during the COVID-19 pandemic, with minimal disruptions to operations or impacts on financial results and credit metrics for full-year 2020 (versus issuers across many other industries). BAE is no exception in this regard, and we expect the group's relatively robust operating performance in 2020 will continue through 2022. Defense and security remains of utmost importance to many governments, underpinned by rising geopolitical uncertainty and increasingly complex threats (e.g., cyber security) coupled with the desire to modernize and digitize their military capabilities. In 2020, BAE's revenue increased 5.3% to ú19.3 billion at year-end, with an S&P Global Ratings-adjusted EBITDA margin of 13.8% and positive free cash flows. S&P Global Ratings-adjusted debt rose to about ú7.5 billion...

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