Increased focus on defence offers momentum for Qinetiq

Steve Wadey, chief executive of defence specialist Qinetiq (QQ.), highlighted the “strong demand” the company is experiencing as it reported a 12 per cent increase in revenue and a near-40-per-cent rise in underlying operating profit to £74.1mn.

Statutory operating profit was even higher, more than doubling to £100mn. However, this was largely due to a gain on hedges put in place against loans to fund its $590mn (£518mn) acquisition of Avantus Federal – a US-based provider of cybersecurity and data analytics software to US government agencies. 

Underlying earnings per share grew by 41 per cent and pre-capex cash conversion ratio increased to more than 100 per cent, from 89 per cent a year earlier, with the company citing better working capital management. 

Its order intake increased by 18 per cent to nearly £800mn, although its backlog remained flat at about £3bn. 

Although some firms have cautioned investors that the increased allocations to defence budgets being made by European nations following Russia’s invasion of Ukraine will take time to filter through given the long cycles to replace tanks, planes and naval vessels, Qinetiq is “a predominantly service-based business”, Wadey said, meaning the benefits are more instantaneous.

This has been reflected in its share price, which has risen by around 33 per cent so far this year, outperforming the 19 per cent gain made by a broader index of UK aerospace and defence companies.

The run-up in its share price led us to move Qinetiq to a hold from a buy recommendation six months ago, arguing that it had entered fair value territory and that more evidence of momentum was required to justify further investment.

The shares have largely traded sideways since and its statement that its underlying profit margin will be at the lower end of its short-term range of 11-12 per cent shaved around 2 per cent off their value. 

Yet the deals done and contracts won in recent months are evidence that it is making good progress as it adopts a tighter focus on the UK, US and Australian markets. 

Qinetiq is a company providing complex, in-demand services in a market that looks set for sustained growth – which is not something that can be said about many others. Although it is currently spending more to meet expected demand, its shares looks like a decent option for a long-term investor. Buy.

Last IC View: Hold, 19 May 2022