Qinetiq in the money

A string of profit warnings have torpedoed the UK's defence sector, but Qinetiq (QQ.) has bucked the trend. A two-year self-help programme repaired the balance sheet, cash conversion is impressive and profits have grown fast. Full-year targets look achievable, too, but after that Qinetiq could struggle like everybody else.

Organic sales fell 8 per cent, but a sharp increase in margins, largely driven by pockets of high demand, sales of spare parts and a £6m one-off contract payment, meant underlying operating profit jumped 16 per cent to £95.3m. Testing RAF fighter jets and training pilots pushed operating profit at the UK services division up 37 per cent to £38.3m. Margins here were higher than usual, too, but renegotiating a long-term Ministry of Defence contract means that's unlikely to be repeated. A slug of orders for its Q-Net anti-RPG (rocket propelled grenade) net came early and demand for spares was high, driving profits at the global products division up 18 per cent to £43.6m. That offset a drop in demand for military kit as the US exits Afghanistan. And services work in the US was predictably weak. Lower sales and fierce competition shunted operating margins here down to 5.5 per cent, slicing profits by a fifth and visibility looks poor.

Broker Liberum Capital expects full-year adjusted pre-tax profit of £145.1m and EPS of 17.7p (from £118.3m and 14.5p for 2012).

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