BAE flies back into the black

BRITAIN'S biggest defence group BAE Systems started to put its recent troubles behind it with a return to the black, although it warned there was 'much more to do to deliver acceptable profitable growth'.

However, the solid interim figures were immediately overshadowed by lurid allegations of multi-million pound 'slush funds' used by the company to bribe Saudi officials, published in the Guardian newspaper.

Pre-tax profits after one-offs and goodwill were £56m, up slightly from the £41m in the first half last year. However, they follow a thumping £616m loss for 2002 as a whole, when the company was damaged by cost overruns on two huge Ministry of Defence contracts.

Before goodwill and one-offs, profits came in at £333m, bang in the middle of the band that the City was looking for but down from £359m last year. Its shares dipped 4p to 170p.

Chief executive Mike Turner said he hoped today's results would mark the end of a rocky period in which the company's figures were often marred by large exceptional items, damaging its credibility in the City. One analyst said the results meant 'BAE is moving towards market rehabilitation'.

Since 1999 the shares have dropped from 531p with a run of profits warnings and disappointing results. He said BAE had no more contracts similar to the Nimrod aircraft and Astute attack submarine deals with the MoD, which caused last year's drop into the red.

Turner said the key aim was to convert its record £46bn order book into strong profit growth. He said he was particularly pleased by the improved cash position, with operating cashflow of £273m compared with a cash outflow of £262m in the first half of last year.

BAE said it was not yet out of the woods but this summer's winning of an £800m Hawk trainer jet order 'has removed a major uncertainty for near-term performance delivery'. Trading is likely to remain in line with 2002.

Chairman Sir Richard Evans said: 'Our key priorities are to deliver sustained profitable growth and increased shareholder value. We will do this by continuing to focus on improving performance across our businesses.'

In the core defence programmes division, profits rose sixfold from £3m to £18m. The interim dividend is pegged, as expected, at 3.7p.

The performance of BAE's equipment in the Iraq war has become a major selling point already for the group. The firm is displaying some of its kit at this week's Defence Systems Equipment International (DSEi) exhibition in London's Docklands, where recent combat proven experience is proving a major draw for international buyers.

The group is eager to tout the all-weather capability of its 105mm light artillery gun - freshly back from Iraq - which according to BAE was able to engage targets in sandstorms when US guns were forced to fall silent.

Turner said: 'I was particularly pleased to receive a strong endorsement from the MoD for our contribution to the Iraq conflict.'

The group was forced into a weary denial of the latest wave of colourful allegations about its business practices from its old adversary, The Guardian.

The newspaper detailed claims from an ex-employee that chairman Evans was aware of a £20m company slush-fund used to bribe Saudi officials since the late 1980s.

The report said the Serious Fraud Office was investigating claims that executives were helping themselves to the money. Part of the money was subsequently used to 'entertain' top Saudis. BAE is even claimed to have paid for a £150,000 house for a young woman, allegedly to please a Saudi royal. Other allegations include the provision of prostitutes, sports cars, yachts and football tickets.

Turner emphatically denied the claims. He said: 'We conduct our business entirely in line with the laws of the UK and countries in which we operate - it's just The Guardian. They do not like the arms trade as they pejoratively call it and keeping having a go at us. There is no slush fund, there never has been and there never will be.'

Asked if the company ever used bribes to secure orders he said: 'Absolutely not.' However, Turner admitted the publication of the claims was 'unhelpful'.

It is not the first time BAE has been accused of bribery. Last year, former International Development Secretary Clare Short hinted that a Tanzanian air control system sold by the company could have been won through corruption.