As the market digested full-year figures for QinetiQ (QQ.), Donald Trump made use of a NATO meeting in Brussels to reiterate calls for other members of the defence alliance to step-up their spending commitments. When we upped our recommendation on the stock to buy last September, it was already clear that the imperative to increase national defence budgets was intensifying in the face of repeated terrorist outrages in Europe and escalating geo-political tensions globally. Eight months down the track and those dynamics are still very much in evidence, but these latest figures from the Hampshire-based defence contractor also demonstrate that the defence market is being driven by increasingly specialised demand, namely for "the type of niche, technology-driven products and test-and-evaluation expertise in which QinetiQ excels".
Full-year revenues ticked up slightly once positive currency translations were discounted, while underlying operating profits were up 7 per cent to £116m. Net capital expenditure increased through the period which, along with an increase in pension fund expense, meant that the underlying cash conversion rate fell to 68 per cent from 95 per cent at the March 2016 year-end. We believe this will be a temporary effect, particularly as the group pension scheme has moved into a £156m surplus from a deficit position a year earlier. This reversal, partly achieved through hedging strategies, is certainly at odds with the general deterioration in occupational funds since gilt yields headed south following the EU referendum. Even after forking out for acquisitions, including a deal to secure the target systems business of Meggitt (MGGT) for £57.5m, together with share buybacks and £33.4m in dividends, the group ended the period with a sizeable net cash position.
The North American arm performed strongly, while management is encouraged by order levels from the Asia Pacific region, specifically the Australian market, which achieved record orders. Closer to home, QinetiQ signed a £1bn amendment to its Long Term Partnering Agreement (LTPA), deemed "the largest and most significant contract since privatisation".
Edison expects adjusted pre-tax profits of £111m for the year to March 2018, leading to EPS of 16.9p (from £107m and 16.3p in 2017).
| QINETIQ (QQ.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 312p | MARKET VALUE: | £1.77bn | |
| TOUCH: | 311.4-312p | 12-MONTH HIGH: | 319p | LOW: 204p |
| DIVIDEND YIELD: | 1.9% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 94p* | NET CASH: | £221m | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 1.33 | -137 | -20.5 | 3.8 |
| 2014 | 0.78 | 84.0 | 10.4 | 4.6 |
| 2015 | 0.76 | 105 | 18.6 | 5.4 |
| 2016 | 0.76 | 90.2 | 16.8 | 5.7 |
| 2017 | 0.78 | 132 | 21.5 | 6.0 |
| % change | +4 | +46 | +28 | +5 |
Ex-div: 3 Aug Payment: 1 Sep *Includes intangible assets of £143m, or 25p a share | ||||
