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BAE shareholders fear blowback from Rolls-Royce results shock

February 17, 2014

Sean Farrell

Investors will be wary of reverberations from last week's profit warning from aero-engine firm Rolls-Royce when BAE Systems reports full-year results on Thursday.

The defence contractor's shares were dragged down last Thursday when pounds 3bn was wiped off Rolls-Royce's market value following its warning. Rolls-Royce shocked the market by largely blaming US and UK defence cuts for an end to 10 years of unbroken growth.

An industry analyst at broker Charles Stanley, Tina Cook, said: "After Rolls-Royce, people will be watching what defence suppliers say very closely."

Rolls-Royce, which makes most of its money from civil aviation, had failed to alert investors to the coming slowdown at its defence division. BAE, which relies far more on defence, has prepared shareholders for the impact of spending cuts in the US, where it makes 40% of revenues.

The other question for BAE is whether it has successfully renegotiated a long-standing deal with Saudi Arabia. The company warned in October that if agreement was not reached by results day it would knock 6p or 7p off 2013 earnings per share.

Cook said: "It's been clear in the case of BAE Systems that they would come under pressure from US and UK defence cuts because they are their important markets, but in light of what has happened at Rolls-Royce's defence division people will still want to hear about that.

"The big focus for BAE Systems is going to be about the Saudi renegotiation. The market has not heard definitively either way since their disclosure in October."

Analysts expect earnings to rise 9.5% to 42.6p a share if the Saudi renegotiation is included in 2013 numbers. Otherwise, annual earnings will fall.

In December BAE revealed a pounds 6bn deal to sell fighter jets to the United Arab Emirates had fallen through. The same day it announced that talks to renegotiate the 2007 deal with Saudi Arabia would drag on into this calendar year.

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Source: Guardian (UK)

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