BAE Typhoon order talks with Saudia Arabia drag on

published 4 January 2012

Defence contractor BAE Systems said its discussions with the Kingdom of Saudi Arabia regarding changes to an order for Eurofighter Typhoon jets are dragging on, and this may put a dent in 2011 earnings.

Back in February 2011 BAE revealed that Saudi Arabia wanted to make changes to its order (known as the Salam programme) for 72 Typhoon aircraft, with the alterations relating to final assembly of the last 48 aircraft on order, plus a few other changes.

At the time, BAE said that its ability to achieve its expected 2011 outcome of earnings per share more or less in line with 2010 would, to some extent, depend on the conclusion of the Salam negotiations.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

While good progress on the Salam discussions has been made in recent weeks, with budgets approved in December on most items, the two parties are still haggling over the formalisation of price escalation clauses.

Budgets have also been established for the next five years of support on the core Saudi British Defence Cooperation Programme (SBDCP) including an upgrade of the training environment, BAE revealed.

Formal contracts under these budgets are being worked on, but until they are signed off, Salam trading performance relating to the formalisation of price escalation, including significant cash payment, will be deferred.

It is not all bad news for BAE, however. The group said that following the signing of a contract for the sale to Brazil of three Offshore Patrol Vessels (OPVs) previously intended for sale to the government of Trinidad and Tobago, the carrying value of the OPVs has been increased.

The group had written down the value of the OPVs after Trinidad and Tobago had cancelled its order.

The uplift in carrying value of the OPVs is expected to largely mitigate the earnings per share impact of the deferred Salam trading in the group's 2011 results, BAE said. This excludes the benefit to underlying earnings per share of around 5.9p per share arising from the UK research and development tax credit agreement, announced on 15 December 2011.

The share price of BAE closed at 286.6p on the day of the announcement, down 8.3p on the day.