QinetiQ on a firmer footing

QinetiQ's shares rose 11 per cent to 110p on the back of its half-year results after the defence company's US division recorded higher than expected product sales for its Q-Net vehicle defence system. Q-Net helped the newly-styled global products division to record a 61 per cent increase in sales to £247m in the six months to the end of September, which helped to boost QinetiQ's overall underlying sales by 6 per cent to £865m.

The problem for QinetiQ is the lumpiness of these additional sales, which comprise one-off orders and special requisitions for US forces serving in Afghanistan. When these are stripped out, the group is still suffering from a combination of a weak UK defence market - service revenues were 7 per cent lower - and margin pressure in both Europe and the US.

QinetiQ also maintained its tradition of booking 'one-off' exceptional items; this time the group had to book a £37m charge to cover the bid costs of its cancelled defence training contract consortium in Wales and a further £33.4m restructuring charge for its UK businesses. Excluding these items, underlying first-half pre-tax profits and EPS both rose 14 per cent to £51.6m and 6.5p, respectively. A working capital inflow helped reduce net debt to £327m, down from £457m in March.

Investec Securities says...

Sell (under review). QinetiQ has turned in a good first-half result and has made progress on its self-help restructuring and reorganisation plan. However, the longer-term outlook in its core markets remains challenging and confidence in the financial performance of the group into 2012 remains low at this stage. On this basis we would be looking at a 5 to 8 per cent increase to our full-year trading profit forecast, while EPS estimates are likely to be raised from 11.4p to 12.5p because of a larger than expected pension finance credit. We place our price target, recommendation and forecasts under review.

JP Morgan says...

Neutral. The outlook remains challenging with uncertainties continuing to weigh on QinetiQ's service businesses on both sides of the Atlantic. Strong product order flow (£413m of orders in the first half) leaves the company well set for 2011, even if the lumpy nature of orders does not guarantee this level of sales in the medium term. We upgrade our March 2011 EPS forecasts by 6 per cent to 12.3p to reflect the stronger-than-expected products performance and pension credit benefit. But we take the opportunity to factor greater caution in the services businesses (and allow for a weaker products performance) by downgrading our March 2012 EPS forecast by 6 per cent to 13.28p.