QinetiQ momentum sapped by problem project

Defence contractor QinetiQ (QQ.) has continued its impressive run of new business wins, but it has been faced with roadblocks in terms of converting these into sales.

The Hampshire-based company reported flat headline revenue, or a 3 per cent increase once the impact of disposals was stripped out.

Profit, however, was weakened by what the company described as two “discrete short-term issues”.

It booked a £14.5m operating profit write-down against a large, complex project, which it blamed on technical delays. The company did not disclose details, as it could prejudice ongoing attempts to renegotiate the fixed-price contract, but chief executive Steve Wadey said it is working to make sure the problem is solved “within the year”.

QinetiQ has also suffered delays to the start of previously-awarded work in the US. Revenue from that market was 18 per cent lower, which it blamed on the short-term effects of Covid-19, the transition to a new administration and a difference in military focus – from counter-insurgency measures in Afghanistan to “emerging near-peer threats in the Indo-Pacific".

The withdrawal from Afghanistan led to some contracts being dropped or delayed, but QinetiQ’s capabilities in areas such as robotics and sensing are “totally aligned” to US customer requirements, Wadey said.

“Both of these problems are bounded and contained and we’re focused on making sure we deliver the full-year guidance,” he added.

QinetiQ’s shares were largely unmoved on results day but they had already fallen by 13 per cent through October when the company flagged the contract problem and revised earnings downwards in a trading update.

It now expects to deliver organic revenue growth of about 5 per cent on its March year-end (when its overall top line stood at £1.28bn) and operating margin “at the lower end” of its expected range of 11-12 per cent, before the £14.5m write down.

New orders were up by more than a fifth to £678m, bringing its backlog to £3bn. In the longer run, the company is still targeting annual revenue of about £2bn by 2026 and an operating margin of 12-13 per cent.

The group's share price is now 19 per cent down on the level prior to last month’s trading update. Berenberg analyst Ross Law argued the near-£300m that has been wiped of QinetiQ’s £1.53bn market cap is “an overreaction”.

UBS analysts forecast earnings per share of 21.25p, implying a PE ratio of 12.5 times – below its five-year average and that of its peer group. Buy.

Last IC View, Buy at 333p, 20 May 2021