Analysts predict take off in BAE's credit rating

While BAE Systems revealed that its 2004 net debt under international accounting standards would increase, market analysts still reacted positively to the aerospace company’s latest disclosure.

In its IFRS restatement, the developer of the Eurofighter and Airbus jets said net assets for 2004 had almost halved from £4.7bn to £2.6bn, and that its net debt would increase to £668m from a credit of £5m.

But Scott Babka and Robert Muir, aerospace and defence analysts at Morgan Stanley, said the IFRS disclosures by BAE were surprisingly favourable – even though the restated numbers suggested otherwise.

BAE’ reported a net debt increase under international accounting standards because of the inclusion of outstanding debt on regional aircraft financing, preference share reclassifications and changed treatment of derivatives.

Babka and Muir, however, had already included these impacts in their previous analysis. But they had not considered the new accounting for pension deficits, a change that saw their estimate for BAE Systems’ net debt fall.

The substantial difference between BAE’s figures under IFRS and the view of analysts emphasises how difficult understanding the new IFRS numbers can be.

The Morgan Stanley analysts said that they had not anticipated ‘a signi-ficant change to the company’s pension deficit’ ahead of the restatement and were surprised by the new details disclosed by BAE. ‘While IFRS does not change future cash flows, the reduction in net debt does have a positive 20p impact on our estimate of BAE’s fair value,’ they said.

The main reason BAE will benefit from IFRS is that it will no longer have to account for the full pension deficit for Airbus UK employees, as it was required to under FRS17. BAE will now only have to account for its proportionate 20% share of the entire Airbus deficit.

Muir and Babka said a ‘reduced pension liability would decrease BAE’s net debt in the eyes of the ratings agencies’ and improve the company’s ‘financial flexibility for future acquisitions’.

They advised, however, that the critical issue for BAE now was to materially reduce its liability in ‘real terms’ and warned that the pension could shift in the future.

‘We caution that future movements in the deficit are still subject to the performance of BAE’s pension assets, and thus the deficit could always increase before it declines,’ said Muir and Babka.

COMPANY REPORTS

William Hill FD receives pay hike for job well done, as Shell reports first quarter under IFRS

FTSE100
Pharmaceutical company AstraZeneca, the makers of Nolvadex and Exanta, reported a 34% increase in operating profit at constant exchange rates for Q1 2005. These were the company’s first IFRS results. The drug company saw Q1 operating profits increase from $1.05bn (£555m) in 2004 to $1.4bn in 2005. The 2004 figures had been restated under IFRS for comparative purposes. AstraZeneca advised that these figures were ‘subject to change’ if there were any amendments to IFRS. The company said: ‘These IFRSs are subject to ongoing review and possible amendment or interpretive guidance and are therefore still subject to change.’

Shell, one of the biggest FTSE100 companies, presented its first numbers under new international accounting standards when it released its Q1 results. Shell reported a 42% increase in income for Q1 2005. The oil behemoth’s income rose from $4.7bn (£2.5bn) in Q1 2004 to $6.7bn in 2005. The company used restated 2004 IFRS accounts for its comparisons. Shell’s share price traded around the 467.5p to 470p range after the announcement.

Roger Payne, FD of pest controller Rentokil Initial, saw his total pay for 2004 increase from £491,000 to £601,000. Payne, who has announced he will retire from his position as soon as a successor is found, earned a £475,000 salary and took home a £100,000 bonus and £26,000 in benefits. Rentokil’s profit before tax for 2004 fell to £297.8m from £396.8m in 2003.

Tom Singer, the group finance director of William Hill, saw his total pay for 2004 increase from £373,316 in 2003 to £421,709 in 2004. Singer received a salary of £257,675, benefits in kind of £18,605, an annual bonus of £95,580 and £49,849 in lieu of dividends. The bookmaker reported a profit on ordinary activities before finance charges of £232m for 2004, up from £200.4m in 2003.

FTSE ALL-SHARE
Paper and pulp multi-national Sappi has said it will have to adapt one of its important internal profitability measures to meet SEC approval. The company uses earnings before interest, tax, depreciation and amortisation (EBITDA), in addition to other profitability measures, and has always reconciled this measure with operating profit. The SEC now requires EBITDA to be reconciled to net profit instead, and as a result the EBITDA will include other income and expenses. Sappi saw half year sales for 2005 increase to $2.4bn (£1.3bn) from $2.3bn in 2004.

FTSE FLEDGLING
Heart of Midlothian chief executive Phil Anderton said the club should not bank on European qualification as a way to improve its financial situation. ‘Qualification for Europe would be an enormous boost, but we must plan to improve our financial position irrespective of any future European bounty,’ Anderton said. Hearts reported a pre-tax loss of £221,000 for the six months to 31 January 2005, an improvement on the £557,000 pre-tax loss for the same period in 2004. On 31 January the club had net liabilities of £6.3m on its books.