A string of profit warnings have torpedoed the UK's defence sector, but
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).
|ORD PRICE:||192p||MARKET VALUE:||£1.27bn|
|TOUCH:||191-192p||12-MONTH HIGH:||208p||Low: 114p|
|DIVIDEND YIELD:||1.6%||PE RATIO:||5|
|NET ASSET VALUE:||91p*||NET CASH:||£21.5m|
|Half-year to 30 Sep||Turnover (£m)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
Ex-div: 16 Jan
Payment: 15 Feb
*Includes intangible assets of £574.8m, or 87p a share
Generating more than £500m of cash over the past three years has left Qinetiq in great shape. But the shares trade on 11 times forecast earnings - a premium to peers - and, with little clarity on military budgets, especially in the US, its qualities look factored in. Hold.
Last IC view: Hold, 146p, 24 May 2012