Rolls-Royce and BAE Systems have raised their profit forecasts as governments worldwide increase defence spending, reflecting a sustained boost for UK defence firms.
Rolls-Royce lifts earnings guidance
Rolls-Royce, which manufactures jet engines for combat and commercial aircraft, turbines for ships and submarines, and small nuclear power plants, increased its underlying operating profit forecast for 2024 to £4.7bn-£4.9bn, up from previous guidance of £4bn-£4.2bn. It also raised its free cashflow forecast from £3.6bn-£3.8bn to £3.8bn-£4bn. The company's share price rose by 5%, leading the FTSE 100.
The defence spending boost follows Russia's full-scale invasion of Ukraine in 2022. Additionally, Rolls-Royce's power generation unit has seen increased demand from datacentres used by AI companies, while its civilian jet engine business has benefited from the post-pandemic recovery in long-haul flights.
Nato commitments and new contracts
Rolls-Royce told shareholders it should benefit from commitments made at the recent Nato summit, including for the Saab GlobalEye airborne early warning system and the MQ-4C Triton high-altitude aerial surveillance system, both of which use Rolls-Royce engines.
Tufan Erginbilgiç, who became CEO in 2023, said the company's “transformation” continues to deliver results. He noted that the company is still gauging the market potential for gas turbines for US datacentres but has already secured future orders. On defence, he said, “I feel a lot better” about order visibility after the UK published its defence investment plan, which confirmed spending on the Tempest fighter jet until 2030 and added £5bn for autonomous weapons.
Development of autonomous drones
Weapons manufacturers are testing large jet-powered drones to fly as “loyal wingmen” alongside crewed fighter jets. Rolls-Royce is developing the engine for the Brontanax drone, revealed by BAE Systems last week. Erginbilgiç stated, “We always had world-leading capability in autonomous but the market didn't exist.” Now that larger drones are in development, “we are the obvious company to build that,” he said, also citing work with the US on uncrewed fuel tankers and Germany on its own loyal wingman.
BAE Systems upgrades profit forecast
BAE Systems reported that sustained increases in defence budgets globally led to an upgraded profit forecast. The company now expects earnings to rise by 10% to 12%, slightly higher than the previous estimate of 9% to 11%. BAE shares gained 2%.
BAE produces a large proportion of the UK's weapons, including tanks, fighter jets, and munitions. It has benefited from demand in the US, which raised weapons spending even before the war on Iran, and other export allies such as several Gulf countries.
BAE cited a contract to provide Turkey with training, support equipment, and services for 20 Typhoon aircraft, and a deal with the US to quadruple production and accelerate delivery of the infrared seeker for the Terminal High Altitude Area Defense (Thaad) interceptor missile. It also holds a £5.9bn contract with the British government to complete the nuclear deterrent submarine HMS Dreadnought.
Charles Woodburn, BAE's chief executive, said: “The global threat picture remains highly volatile and governments are responding with sustained increases in their defence budgets. The combination of our proven execution, diverse geographic footprint and continued investment in our technology and facilities, alongside our healthy order backlog and growing opportunities across our markets, positions us to keep delivering long-term growth.”
