Iraq and Afghanistan make BAE extra profits

Profits top £1bn as BAE cashes in on US

NICK BEVENS
BUSINESS EDITOR (nbevens@scotsman.com)

BAE Systems, Britain's biggest arms manufacturer, has unveiled profits of more than £1 billion just months after the government quashed a Serious Fraud Office (SFO) probe into the business.

Operating profits jumped 33 per cent for 2006, from £761 million to £1.1bn, driven in part by booming US business from the conflicts in Iraq and Afghanistan, and its shares jumped 4.3 per cent to 466.5p.

Orders increased to £31.7bn, mainly due to US demand for land vehicles and arms and contracts to support the Tornado fighter aircraft. The company, which unloaded its 20 per cent share in Airbus in May, also reported good progress in Saudi Arabia, the market about which it faced severe pressure last year due to long-standing corruption allegations.

But Vincent Cable, the deputy leader of the Liberal Democrats, immediately condemned the results as "utterly artificial".

He said: "The company's profits depend on major, UK government-supported, export contracts - around which there are unresolved allegations of corrupt commission payouts and pending prosecutions - or on favoured contracts for government procurement."

It was in December that BAE became the focus of unwelcome headlines around the world when the government ordered the SFO to halt a major criminal investigation into allegations that it paid bribes to Saudi officials in return for orders. The government, claiming it was on the grounds of national interest, was heavily criticised over the decision by, among others, international anti-corruption agency the Organisation for Economic Co- operation and Development.

The SFO investigation into the Saudi contracts had led to fears that the company could lose a 72-jet order for Typhoon aircraft from the kingdom.

BAE has denied any wrongdoing. Chief executive Mike Turner said BAE maintained the highest ethical standards and would co-operate with any requests from the SFO, which is still investigating past BAE dealings in South Africa, Tanzania, Romania, Chile, the Czech Republic and Qatar.

In a reference to the government decision to pull the investigation, Turner told financial analysts: "Following the problems during the autumn, the contract negotiations for Typhoon, including a time table for delivery, are progressing."

In a wider comment on reports of corruption investigations facing the company, Turner said the allegations were "all unsupported by evidence. We have been clear and consistent in denying any wrongdoing".

He said there was still a major opportunity in "supporting the partnership" between the UK government and Saudi Arabia, playing a key role in upgrading the kingdom's armed forces.

However, much of its growth is now coming from the US on the back of a series of Homeland Security contracts and deals to support the military campaigns in Iraq and Afghanistan. BAE's order book is fuelled mainly by contracts in its North American land and armaments business.

BAE completed the sale of its £1.8bn stake in the struggling planemaker Airbus last October. Some £500m is being used to fund buybacks but BAE reiterated that the balance will go back into the business.

The full-year dividend is going up 9.7 per cent to 11.3p per share.

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