Qinetiq: orders and momentum pick up

Things took a while to get going at defence technology specialist Qinetiq (QQ.) last year, most notably in the US where political wrangling over the federal budget slowed contract awards.

This provided a brief moment of concern for investors, not least because this is the market in which the company had splashed out $590mn (£483mn) on Avantus a year earlier – its biggest ever deal.

A stronger second half put some of those fears to rest, though, with the company reporting improved revenue growth in the second half and a big pick-up in orders. Avantus secured $977mn of orders during the year, a book-to-bill ratio of 1.2 times.

Qinetiq chief executive Steve Wadey expects this improvement to continue, with Avantus set to achieve mid single-digit growth this year, rising to double-digit levels from 2026 onwards. Qinetiq upgraded guidance for the current financial year. It now expects high single-digit revenue growth and a “stable” operating profit margin, which has hovered around the 10.5 per cent market for the past couple of years.

It also performed well on the cash front. Underlying operating cash flow increased by £50mn to £320mn last year. Net debt was cut by almost £56mn to £151.2mn, or 0.5 times Ebitda.

This gives it “optionality to invest in the business”, but also to return more cash to shareholders, Wadey said on an earnings call.

And although the integration of Avantus is now complete, hunting for other big deals doesn’t appear to be at the top of its priority list.

“Our near-term focus is absolutely on organic growth,” Wadey said, specifically hitting its stated goal of reaching £2.4bn of organic revenue and a 12 per cent margin by 2027. This means growing at a rate of about 8 per cent a year, or 11-12 per cent if small bolt-ons are factored in.

It also leaves the door open for more cash to be returned to shareholders. Qinetiq upped its full-year dividend growth rate to 7 per cent and in January announced plans to buy back £100mn-worth of shares over the next 12 months.

Qinetiq’s shares rose by 13 per cent after the results were published, bringing their year-to-date gain to 36 per cent. They now trade on 13.6 times earnings, in line with their five-year average. The shares have momentum, though, and more buybacks could be on the cards if no obvious use is found for the growing cash piles it is generating. Buy.

Last IC view: Buy, 337p, 16 Jan 2024