MoD shortfall pressures QinetiQ

The contractor’s share price has fallen due to a looming shortfall in the domestic defence budget. The MoD is under pressure to slash short cycle costs to help pay for two new aircraft carriers and their accompanying fleets of F-35 fighters. This imperative has been compounded by the post-referendum devaluation of sterling, as the bulk of costs linked to these items are incurred in US dollars.  

But management believes the funding shortfall will have limited impact due to its long-term partnering agreement (LTPA) with the MoD for testing, evaluation and training services. The group believes its share of the addressable global market in these areas could expand due to the repatriation of evaluation work currently carried out abroad, in addition to attracting more overseas customers. Last December’s amendment to the LTPA entails a capital expenditure commitment of £180m, mainly over the first three years of the 11-year programme, which should guarantee a long-term contingent revenue stream, but will constrict net cash flows.

Despite tough trading conditions, QinetiQ's half-year numbers were impressive. Underlying operating profit rose 11 per cent to £57.5m, albeit with a £6.5m boost from non-recurring items. Orders were down from the 2016 half year, although this was wholly due to a £109m contract renewal from the MoD in the prior period. Meanwhile, 89 per cent of expected revenue in the year to March 2018 is already under contract and the funded order backlog stood at £2.0bn from £1.27bn a year earlier.