- Order book up 10 per cent to £1bn
- New £80mn, 10-year contract won from MoD
The muted reaction to Qinetiq’s (QQ.) third-quarter trading update is understandable, given the loftier expectations of growth in a sector where valuations have re-rated following Russia’s invasion of Ukraine last February.
On the one hand, the company reported that its order book stood at £1bn – a 10 per cent uplift on the same level last year. On the other, this is only a £200mn increase on the £800mn of orders secured in the first half.
The gains made in European defence stocks over the past 12 months have been selective. The strongest performers have been German tank maker Rheinmetall (DE:RHM) and detection systems provider Hensoldt (DE:HAG) – both of which have doubled in value as the country lifted defence spending to meet NATO commitments.
On the London Stock Exchange, however, there have been almost as many losers as winners – shares in Babcock International (BAB) and Avon Protection (AVON) are in negative territory, weighed down by company-specific issues, while Chemring (CHG) and Cohort (CHRT) shares are largely flat. In fact, it is only Qinetiq and BAE Systems (BA) shares that have made major gains – up 20 per cent and 41 per cent, respectively.
The reason for this is that increases in defence budgets can take years to feed through in terms of contracts for new tanks, boats or planes. BAE Systems’ more immediate gains can be attributed to the fact that it first provided artillery to the Ministry of Defence (MoD), which in turn supplied the Ukrainian army. Now the MoD is providing BAE-made Challenger 2 tanks.
Qinetiq, too, is more fleet-footed, given the nature of many of its services – cyber security support doesn’t need as long a lead time as a programme to build new aircraft carriers. Earlier this week, the company announced an £80mn, 10-year contract with the MoD “to accelerate and transform mission data protection”.
Although orders were lower in the three months to December, “we think it would be unfair to judge Qinetiq on a quarterly basis” given the lumpiness of contract awards, broker Jefferies said.
Qinetiq maintained its full-year guidance of “high single-digit” organic growth and an underlying profit margin of between 11-12 per cent.
Despite the recent run-up, Qinetiq shares still trade at under 13 times FactSet consensus forecast earnings of 27p a share. This is below both their five-year average of around 15 times, and their peer group. Given the robustness of demand in defence spending, we maintain our buy rating.
Last IC view: Buy, 356p, 10 Nov 2022
