Shares Of BAE Systems Drop Over Germany’s Ban On Arms Exports To Saudi Arabia

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Last Thursday, the share price of BAE Systems, a defence company, sharply dropped after it warned that a German ban on arms exports to Saudi Arabia that was imposed after the murder of Jamal Khashoggi, the American journalist, could scupper a multibillion-pound deal to sell Typhoon fighter jets.

Alongside its yearly results that were released last Thursday, BAE Systems emphasised that its business is “reliant on the approval of export licences by a number of governments in order to continue supplies to Saudi Arabia.” The Gulf state accounted for approximately 14 percent of the annual sales of BAE for the previous and is considered as a key customer for the Typhoon.

Germany is part of a four-country consortium that builds the Eurofighter Typhoon and the ban could threaten the future of lead partner BAE’s pending £10 billion deal to sell 48 new jets to Saudi Arabia.

BAE said that the arms export embargo of Germany could also threaten its maintenance and support contract with Saudi Arabia for the Typhoon, which currently brings in approximately £2.5 billion in annual revenue for the UK company.

BAE warned: “Current German government position on export licensing may affect the group’s ability to provide a capability to Saudi Arabia, which may have a consequential impact on the group’s financial performance and relationships.”

Shares in the firm closed down almost 8 percent at 465p, as investors took fright at the warning.

Last November, Germany announced that it would no longer offer arms export licences to Saudi Arabia over the murder of Khashoggi. The United Kingdom has been critical over the dissident death of the journalist, however, it has so far refused to take similar action. Last week, a Lords committee slammed the British government for being on “the wrong side of the law” amid the concerns that the arms of the United Kingdom that was sold to Saudi Arabia were being used in the war in Yemen.

BAE Systems is headquartered in London and Farnborough. It said that it was “working closely with the UK government to minimise the risk of any such occurrence and the impact it would have on financial performance, the supply chain and relationships.”

This week, Germany turned down a plea by Jeremy Hunt, the foreign secretary of the United Kingdom, to restart the arms sales to the Gulf state. Reportedly Hunt warned in his letter that Riyadh was seeking compensation from BAE over the German ban.

During a joint press conference in Berlin with the Heiko Maas, German foreign minister, Hunt was informed that his plea for a resumption of arms sales made in a leaked letter had been turned down for the moment.

Maas said that any future decision would be “dependent on developments in the Yemen conflict and whether what was agreed in the Stockholm peace talks are implemented.”

Last December, the two sides in the Yemen civil war met in Sweden to begin a process of confidence building. It included a limited ceasefire in the Red Sea port of Hodeidah. However, no date has been set for the resumption of the main negotiations and few expect a settlement for many months.

BAE is still expecting higher profits for this year. According to the latest earnings report, it forecasted a “mid-single digit” growth in earnings per share for 2019. The underlying earnings per share were relatively flat in 2018 at 42.9p as compared with 42.1p for the previous 12 months.