BAE and Rolls-Royce profits boosted by services growth

Britain's BAE Systems<BAES.L> and Rolls-Royce<RR.L> reported higher first-half profit, driven by growing services revenues, and said tight cost controls and demand from emerging markets would help deliver further growth.

BAE, Europe's largest arms contractor, reported a 14 percent rise in first half earnings, helped by strong growth and its customer support and services business, which covers maintenance and upkeep of military assets.

British engine and turbine maker Rolls-Royce, meanwhile, posted a 4 percent rise in first-half profit, helped by improving trade at its marine services division.

"Continued strong growth in its marine business further demonstrates that Rolls is more than just a commercial aerospace company," said Nomura analyst Jason Adams.

BAE said it aims to grow its support and maintenance business to offset expected cuts in European defence procurement programmes.

Shares in BAE were 1.9 percent up at 323.5 pence by 0845 GMT, while Rolls was trading 1 percent higher at 595.5 pence.

Defence budgets are flat or declining in the U.S. and Europe, making it vital for companies to find revenues overseas and cut production and overhead costs.

BAE's Chief Executive Ian King told reporters that there would "probably be more job losses in the second half", following a headcount reduction of 3,300 in the first half.

"This is an ongoing programme because we want to provide better value for money for our customers and we're driving this quite hard," said King.

Rolls-Royce expects to deliver higher full-year profit, largely as a result of tighter cost controls.

EMERGING DEMAND

Both companies said they expected demand from emerging markets to fuel future growth, following unprecedented levels of interest in warplanes and other weapons from the Middle East and Asia at last week's Farnborough airshow.

"The Middle East and Asia is currently where the growth is but South America is also interesting, basically the markets driven by transport and energy deficits," Rolls-Royce Chief Executive John Rose said on a conference call.

BAE's King earmarked India, which on Wednesday signed a 500 million pounds deal to buy 57 Hawk jets from BAE, and Brazil as two of its key future growth markets.

"If you look at the projections of what India will spend on the recapitalisation of its armed forces then in 10 years time it will become number two behind the U.S. in terms of defence spending," he said, adding that Brazil was "top of the list" to become its next home market.

BAE posted underlying earnings before interest, taxes and amortisation of 1.11 billion pounds on sales 9 percent higher at 10.64 billion pounds for the six months to the end of June, while Rolls posted an underlying first-half pretax profit of 465 million pounds, up from 445 million a year ago.

British defence firm QinetiQ provided a gloomier update, however, saying defence markets in the UK and U.S. remained challenging and that a review of defence spending in Britain made making forecasts difficult.

Also on Thursday UK defence firm Cobham said it had been selected as a prime contractor to provide infrastructure and deployment support services to the U.S. Missile Defense Agency.

(Additional reporting by Paul Hoskins and Sarah Young; Editing by Matt Scuffham and Jon Loades-Carter)