BUSINESS LIVE: Royal Mail’s IDS fined over delivery failures; BAE Systems sales jump; British Land rents soar

Aarin Chiekrie, equity analyst at Hargreaves Lansdown:

‘BAE occupies a key space in the defence market, and another promising update proves why the group’s so highly regarded in the defence space. With some of its biggest buyers, the UK, US and Europe, all expected to continue raising defence budgets over the coming years, the sky really is the limit for this jet-maker.

‘Given the elevated threat environment, demand for BAE’s products and services has remained strong with around £10bn of order intakes since the half-year mark. That takes the year-to-date figure up to around £30bn, and because these are typically long-cycle orders, with payments spread over several years, it gives BAE multi-year revenue visibility.

‘That’s given management the confidence to reiterate all recently upgraded full-year guidance, which is something of a novelty for most businesses in the current uncertain environment.

‘The regulatory process around BAE’s mammoth $5.55bn acquisition of Ball Aerospace is progressing well and is set to close in the first half of 2024, and it looks like a good fit for BAE. Ball Aerospace provides mission-critical space systems and defence technologies across air, land and sea – complementing BAE’s suite of products nicely.

‘The acquisition should add around $2.2bn in revenue to BAE’s top line, before growing at a compound rate of around 10% annually over the next 5 years. And given the similarities between the two businesses, there’s clear scope to streamline operations, cut costs and boost profit margins.’

British Land now expects annual rental growth at the top end of its previous forecast range, but yields on assets remain under pressure in a high interest rate environment.

Aggressive rate hikes have hit the investment business of British landlords, even as strong operational performance has fuelled a tentative sector recovery from pandemic lows.

British Land expects strong occupational fundamentals in its sub-markets despite the uncertain macro-economic environment, with its portfolio yield now more than 6 per cent and an increased chance of UK base rates approaching their peak.

BAE Systems has maintained its guidance for annual earnings to rise as much as 12 per cent as orders for military kit continued to flow at a time of heightened geopolitical risk, benefiting Britain’s biggest defence company.

BAE upgraded its forecast in August, guiding that earnings per share would grow by 10 to 12 per cent in 2023 after orders soared following Russia’s invasion of Ukraine last year.

Since then, Israel’s invasion of Gaza in the wake of the 7 October Hamas attack has upsettled stability in the Middle East.

BAE booked £10billion of orders since the end of June, including £3.9billion of funding for the next phase of the AUKUS submarine programme between Australia, Britain and the United States.

‘Order flow on new and existing programmes, renewals on incumbent positions and progress with our opportunity pipeline remains strong,’ chief executive Charles Woodburn said in a statement.

Britain’s communications watchdog has slapped Royal Mail owner International Distribution Services with a £5.6million fine over failures to meet delivery targets over the last year.

Ofcom said in May it was probing the company over its failure to meet delivery targets in for the year to end-March, 2023.

Ian Strawhorne, Ofcom director of enforcement, said: ‘Royal Mail’s role in our lives carries huge responsibility and we know from our research that customers value reliability and consistency.

‘Clearly, the pandemic had a significant impact on Royal Mail’s operations in previous years. But we warned the company it could no longer use that as an excuse, and it just hasn’t got things back on track since.

‘The company’s let consumers down, and today’s fine should act as a wake-up call – it must take its responsibilities more seriously. We’ll continue to hold Royal Mail to account to make sure it improves service levels.’