QinetiQ Group plc Ord GBP 0.01 (QQ.)

Company overview

Qinetiq operates in the arenas of defence technology and security systems. Products both manufactured and supplied include unmanned aerial vehicles, missiles, robotic systems and advanced security systems for computers. The group also provides support services to government organisations such as the MOD and the US Department of Defence. A simplified group structure has recently been implemented, with three divisions: 1) US Services 2) UK Services and 3) Global Products, now in operation. The company is currently a constituent of the FTSE-250 index.

HL Comment (23 November 2011)

Global defence technology company QinetiQ reported a return to a half-year profit recently, (23 Nov) and said it would exceed its own earnings expectations for the full year. Net profit for the six months to the end of September was £66.6 million, reversing a £42.1 million loss in the same period a year ago. First-half revenue fell 14% to £739.6 million from £864.9 million. The results reflected efforts started by the group 18 months ago to cut costs and streamline the company’s operations, including a 30% saving on some outsourced work. As part of its ongoing restructuring programme, QinetiQ's U.S. services businesses were integrated under a single leadership structure. This re-organisation removed overhead costs of more than $20 million. It also cut its headcount by 7% in the first half to 10,435 staff, added management.

Negative Points:

• The US defence market, the world's largest, said it was capping its military budget at 2011 levels next year, significantly less than its defence department requested, after a Congressional committee tasked with drawing up a deficit reduction plan failed to reach agreement this week.
• The European defence market is being undermined by government deficit reduction programmes.
• QinetiQ operates on a highly competitive marketplace.
• The company is exposed to foreign exchange fluctuation.
• The group's pension liability stood at £171.1 million (31 March - £92.2million). The change is primarily driven by falls in equity markets.

Positive Points:

• The group said that its internal re-organisation programme started in May last year had helped to simplify the structure of QinetiQ’s business divisions.
• Management expects to exceed its original earnings expectations for the current year by 20%.
• The ongoing restructuring programme (which has been very successful in improving cash conversion and reducing net debt) could be extended to target margin improvements.
• QinetiQ could find itself an acquisition target should the defence industry evidence a degree of consolidation.
• Historically, an uncertain global economic outlook has proved favourable for defence companies.
• An interim dividend payment of 0.9p per share has been declared.

Consensus:

On balance, market consensus indicates a sell.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.