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Qinetiq upgrades long-term revenue outlook

Defence tech specialist targets £3bn turnover by 2027
May 25, 2023
  • Organic revenue and operating profit grow by double digits
  • Growth in Australia and US to outpace domestic expansion

The re-rating of Qinetiq (QQ.) shares in the wake of last year’s invasion of Ukraine by Russia is entirely justified on the basis of its performance over the past 12 months.

Although many of its prime contracting peers were likely to face delays to orders given the slow-moving nature of government budget programmes and defence procurement, its services-led model – and the immediate need to step up cyber defences – meant the technology specialist was always going to be a more immediate beneficiary of increased spending.

Revenue grew by 20 per cent and operating profit by 40 per cent, helped by the acquisitions of Avantus in the US and Air Affairs Australia. Even on an organic basis, both experienced double-digit growth.

Moreover, its earlier decision to pull back from Europe to focus more exclusively on the UK, US and Australian markets looks prescient given the greater collaboration on defence spending between these three nations under the Aukus pact.

“The market is coming towards us in terms of alignment,” chief executive Steve Wadey said.

Avantus, bought for $590mn (£483mn) in August last year, is already largely integrated in terms of operations and providing useful cross-selling opportunities. The increased scale and capability of the combined business allows it to target work “that neither organisation could have pursued independently”, Wadey added.

The company maintained guidance for its current financial year, saying it expects high single-digit revenue growth against current run rates and an operating margin “at the lower end” of its 11-12 per cent target range.

However, it upgraded longer-term targets, saying it expects to be a £3bn turnover company by 2027. This is based on faster organic growth and a much larger addressable market. It also expects its US and Australian business to grow much more quickly than its home market – UK-generated revenue is set to fall from 73 per cent of the total in 2022 to around half by 2027.

Qinetiq had flagged improved earnings in a trading update last month, so the response to these results was fairly muted – especially since the company's shares have already risen in value by 47 per cent since the Russian invasion.

And a growth strategy that involves acquisitions is not without risk. However, Qinetiq is performing well in a fast-growing market and on a price/earnings ratio of 13.5 times FactSet consensus earnings its shares trade below their historic average. We maintain our buy rating.

Last IC View: Buy, 344p, 18 Jan 2022

QINETIQ (QQ.)    
ORD PRICE:379pMARKET VALUE:£2.2bn
TOUCH:378-379p12-MONTH HIGH:396pLOW: 315p
DIVIDEND YIELD:2.0%PE RATIO:14
NET ASSET VALUE:167p*NET DEBT:22%
Year to 31 MarTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20190.9112320.16.6
20201.0712318.76.6
20211.2814321.46.90
20221.3212615.77.3
20231.5819226.87.7
% change+20+53+71+5
Ex-div:27 Jul   
Payment:24 Aug   
*Includes intangible assets of £752mn, or 130p a share