House broker turns on BAE
SHARES in BAE Systems went into a tailspin as the beleaguered defence giant's own brokers turned on the company, saying its latest mishap could cost it £1bn.
BAE stock dived 28p or 21% to 103p after last night's shock warning of 'substantial' cost overruns on £5.5bn of key Ministry of Defence contracts.
The latest slide means £2bn has been wiped off BAE's market value since Wednesday afternoon. The shares are now at a nine-year low and have fallen more than 75% in the past six months.
Just eight minutes before the close of last night's trading, BAE sounded the alarm over the £2.8bn upgrade of the Nimrod patrol aircraft and £2.7bn order for the Astute attack submarine, both contracts with the MoD.
Joint house broker ABN Amro downgraded the firm from 'buy' to 'sell', saying it had no clear indication of how much the contract glitches would cost. 'Forced to guess,' the broker said, 'we'd say £500m to £1bn. When contracts go wrong they sadly tend to go more wrong. Clearly BAE wants the MoD to pick up much of the tab.' It feared the full-year dividend could be cut by more than 40%.
The latest setback heaps pressure on BAE and its chief executive of less than a year Mike Turner, who is having to firefight on several fronts.
There is increasing speculation that BAE could lose the £10bn order for the Royal Navy's two new aircraft carriers to its French arch-rival Thales. Although the French claim that Thales will use mainly British workers if it wins the order, BAE has been warned that any such move by the MoD would end BAE's future as a British-based defence company.
Britain's commitment to the Eurofighter/Typhoon project is also in doubt after the MoD confirmed it has delayed taking delivery of the massive order by six months.
Traders said they were spooked not only by the potential cost to the company of the overruns but by the fact that BAE is creating ongoing uncertainty by only promising an update at its full-year results, due in February. 'Discussions with the MoD are likely to take some months and no assurances as to the outcome can be given,' said BAE.
ABN said the full-year dividend could be cut to 5p a share, from 9p last time. The interim payout was 3.7p a share. 'BAE could maintain the dividend,' it said. 'But we're not sure that would be correct given the uncertainty in other areas. Ultimately, we believe dividend policy must reflect the company's performance. As these issues will do BAE for some years, we expect a dividend cut.'
Goldman Sachs predicted BAE faced an £800m charge for the cost overruns. The US investment bank said it lacked confidence in BAE's forecasts and its managers' ability to manage the contracts and cash. 'BAE needs to take radical action to staunch this bleeding,' it said.
Broker Credit Suisse First Boston cut its price target for BAE shares to 250p from 280p. 'How can we be sure there is no further bad news on other contracts?' it added.
Defence sources said that while the MoD does not want BAE Systems to get into serious financial problems, the ministry is not prepared to stand behind the company when it is racking up cost overruns.
In September, Turner shocked investors at his maiden interim results by posting a larger-than-expected 75% crash in profits as well as warning of contract costs or losses.
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