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Questor: strong performance has not moved the share price. But we’ll stick with BAE Systems

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An artist's impression of the Dreadnought-class submarine
An artist's impression of the Dreadnought-class submarine

Aerospace and defence firm BAE Systems has proved to be a relatively robust performer during the pandemic. Its sales and operating profit increased by 5pc and 2pc respectively in 2020 while many of its rivals experienced a sudden and large-scale decline in financial performance.

Encouragingly, this year’s half-year results showed that BAE was making further progress. Sales increased by 6pc year on year and underlying earnings per share rose by 25pc. This enabled a 5pc rise in dividends and the stock now has a forecast yield of around 4.5pc.

Despite its solid performance, the company’s share price has declined by 2pc since Questor advised readers to buy the stock in December 2019. Nevertheless, it has outperformed the FTSE 100 by 6 percentage points since our tip.

Furthermore, its financial position remains sound. Net debt is only marginally higher than it was at the end of last year. It amounts to just 38pc of the company’s net assets, while net finance costs were covered nine times by operating profits in the first half of the year. This suggests that BAE is in a strong position to overcome possible short-term challenges posed by the pandemic.

Of course, the outlook for global defence spending is far less certain than it was at the time of our tip in 2019. The US defence budget increased by just 1.6pc this year, which is less than inflation, and large deficits caused by stimulus action in response to the pandemic may lead to a slower rate of growth in global defence spending than previously.

Despite this, factors such as geopolitical risks in the Middle East, a strong global economic recovery and a commitment among Nato members to increase defence spending to 2pc of economic output could prompt buoyant demand for BAE’s products and services.

Moreover, the stock’s price-to-earnings ratio of 12.6 suggests that an uncertain future may be factored into its valuation. Therefore, while further share price volatility cannot be ruled out in the short run, we retain our long-term optimism.

Questor says: hold

Ticker: BA.

Share price at close: 557.6p

Update: Polymetal

The gold miner Polymetal has also delivered a strong financial performance since we advised readers to buy its shares in March 2020. Its revenues and net earnings in 2020 increased by 28pc and 125pc respectively as demand for gold surged amid an uncertain economic environment.

Additionally, the company delivered a 12pc rise in sales and an 11pc increase in net earnings in the first half of 2021. It benefited from a buoyant gold price throughout the period.

However, its shares have become relatively unpopular among investors over recent months, thanks in part to inflationary concerns. Indeed, the wider mining sector is currently experiencing rampant price rises across a wide range of equipment, raw materials and wages that have the potential to squeeze profitability.

As a result, Polymetal’s shares have underperformed the FTSE 100 by 26 percentage points since our tip in spite of their 9pc rise over the period.

In response to rising input prices, Polymetal has increased its capital expenditure guidance for the current year from £400m to between £480m and £520m. A proportion of its additional spending will be used to pre-order mining equipment that could eventually be in short supply because of challenges such as chip shortages that are affecting supply chains.

Additional capital expenditure will also be used to accelerate ongoing projects. Meanwhile, the company remains on track to meet its full-year guidance for an “all-in sustaining cash cost” of $975 per ounce or less. This suggests that profitability could remain high while the gold price is currently at $1,775 and the appetite for a rapid tightening of monetary policy seems limited.

Polymetal’s shares currently trade on a price-to-earnings ratio of 8 and yield 7.1pc from a dividend that was covered 1.8 times by profit last year. In Questor’s view, the firm’s valuation adequately prices in the risks it faces from rising input costs. Moreover, it may be a strong performer should the post-Covid economic recovery falter.

Questor says: hold

Ticker: POLY

Share price at close: £13.33

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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