BAE Systems warns of risk from German stance on Saudi arms

By Alistair Smout

LONDON (Reuters) - Leading British defence contractor BAE Systems said German moves to block exports to Saudi Arabia could damage its major deals with the country and weigh on its financial performance.

BAE said it was reliant on the approval of export licences by a number of governments in order to continue supplies to Saudi Arabia.

"The position on export licensing currently adopted by the German government may affect the group's ability to provide the required capability to the kingdom," it said in its annual financial results on Thursday, adding it was working with British authorities to minimise the risk.

Shares in BAE slid 6.2 percent, with two traders attributing the share price weakness to the comments on Saudi Arabia.

Germany is part of the consortium that builds the Eurofighter Typhoon, a fighter jet that BAE has sold to Saudi Arabia, through Airbus and MTU Aero Engines.

Germany's government is trying to halt weapons exports to Saudi Arabia after the killing of Saudi journalist Jamal Khashoggi in the Saudi consulate in Istanbul last October but Britain has urged the country to exempt big defence projects or face damage to its commercial credibility.

On Wednesday, Germany's foreign minister said that future decisions on delivering arms to Saudi Arabia will depend on how the conflict develops in Yemen, while members of Britain's upper house of parliament last week warned that arm sales to Saudi Arabia could be on the "wrong side" of international law due to the Yemen conflict.

BAE makes 14 percent of its annual sales from selling Typhoons and other arms to the Saudis and the tensions have raised questions about the UK government's 10 billion pound deal to sell Saudi Arabia 48 new Typhoons.

The deal, confirmed in a memorandum of understanding last March, has not been finalised, and is not reflected in BAE's 2018 financial statements.

An industry source said that in addition to the 48 new aircraft, Germany is also blocking spare parts, so BAE is close to grounding the existing fleet of 72 Typhoons already in the kingdom.

"The issue of German licences is a political issue and as such requires it to be resolved at the political level... To date, the impact has been minimal, but over time, it could become more difficult," Chief Executive Charles Woodburn told reporters on Thursday.

"It's worth remembering that this is not a cliff-edge scenario, and we're working on a number of mitigation plans."

Despite the issue of Saudi exports and other geopolitical uncertainty, BAE said its earnings would grow in 2019 compared to a flat 2018.

BAE said it expected mid-single digit growth in underlying earnings per share in 2019, compared to a full-year figure for last year of 42.9p, roughly flat on the previous year and in line with expectations.

It said that it was targeting in excess of 3 billion pounds of free cash flow over a three year period, but that cash generation would not be linear. One trader said that the firm missed free cash flow targets which contributed to the share price weakness.

(additional reporting by Stephen Kalin in Riyadh and Helen Reid in London; Editing by Paul Sandle/Keith Weir)