For Footsie investors, BAE Systems (LSE: BA) continues to be something of a turn-off. It’s understandable why this is so. The defence behemoth’s share price has taken an almighty whack since the murder of Saudi Arabian journalist Jamal Khashoggi in October, and the subsequent concerns over sales restrictions to the country’s military forces.
I’ve laid out my opinion that BAE Systems is unlikely to suffer as a result of the political fallout, but full-year results released last month sent a chill down many an investor’s spine and prompted a subsequent fall in the firm’s share price. In the release, the firm chillingly warned that the “current German government position on export licensing may affect the Group’s ability to provide capability to Saudi Arabia which may have a consequential impact on [its] financial performance and relationships.”
Germany takes the lead
Being a major contributor to the Eurofighter Typhoon project, Germany’s decision to stop exports to the Middle Eastern state threatens supply of this aircraft in the years ahead, a major profits generator for BAE Systems via hardware sales, as well as through subsequent service revenues. Total turnover at the business slipped £100m in 2018 to £18.4bn because of lower production of the aircraft, illustrating the importance of the programme on the company’s bottom line.
Saudi Arabia remains locked in negotiations to take more 48 of the jets, but Germany is yet to loosen its embargo. Indeed, the extension of the export ban in early March to the end of the month, as Berlin considers the Khashoggi killing as well as the House of Saud’s role in the Yemen civil war, shows that the issue is far from being satisfactorily resolved for the arms-makers.
Cheap price, big yields
That said, could now be a great time to pile into BAE Systems. Its low rating (a forward P/E ratio of 10.9 times) arguably bakes in the possibility of a painful ban on exports to Saudi. I would go one step further and suggest that this cheap multiple could spark a share price surge in the days or weeks ahead.
Why? Well the pressure is mounting on all sides for the German government to revoke its export ban. Not only from the corridors of power in France and Britain (those other contributors to the Typhoon programme fearing a collapse in aircraft revenues in the years ahead), but from major influencers at home as well.
Düsseldorf-based arms contractor Rheinmettal has led industry calls for restrictions to end, and even suggested that it could sue the government for loss of revenues. On top of this, new leader of the Christian Democrats Annegret Kramp-Karrenbauer has called on the party’s coalition partners, the Social Democrats, to lift the ban, citing the devastating impact that this could have on jobs in the years ahead. German politicians won’t want to be seen jeopardising German jobs at a time when the domestic economy is showing signs of increased stress.
Clearly BAE Systems isn’t without risk, but I believe the concerns over future Typhoon sales are reflected in the current share price. If you’re looking for an attractive contrarian stock to buy today I think this Footsie firm is worth serious attention, and particularly for income hunters — yields for this year and next currently sit at a chubby 4.8% and 5% respectively.
