De-risked with investment catalysts

QinetiQ Group 10 August 2016 Update

QinetiQ Group

De-risked with investment catalysts

AGM trading update

Aerospace & defence

10 August 2016

Price

223.80p

Market cap

£1,297m

Net cash (£m) at 31 March 2016

274.5

Shares in issue

579.6m

Free float

96%

Code

QQ

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.2)

(1.8)

(4.9)

Rel (local)

(4.9)

(11.4)

(6.5)

52-week high/low

274.4p

212.0p

Business description

QinetiQ provides technical support services to customers in the global aerospace, defence and security markets. The group operates through two divisions: EMEA Services (82% FY16 sales) and Global Products (18% FY16 sales).

Next event

Interim results

17 November 2016

Analyst

Roger Johnston

+44 (0)20 3077 5722

QinetiQ is a research client of Edison Investment Research Limited

QinetiQ’s July AGM statement highlighted that conditions remain as at the full year results, demonstrating that the group continues to deliver sustainable cash-generative growth. CEO Steve Wadey’s strategy is to drive the core UK business, expand internationally and ensure continued innovation underpinned by a transformation programme to improve customer focus and competitiveness. With c £275m of cash on the balance sheet and further cash generation expected in FY17, the group’s capital allocation policy guides uses of cash to promote conditions for growth through increased capex and select bolt-on acquisitions.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

782.6

101.2

13.8

4.6

16.2

2.1

03/15

763.8

107.8

15.2

5.4

14.7

2.4

03/16

755.7

108.7

16.3

5.7

13.7

2.5

03/17e

767.8

105.1

15.6

6.0

14.3

2.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY results showed cash generation continues

QinetiQ published positive FY16 results in May despite an uncertain environment, demonstrating once again the robust and cash-generative nature of the group. Revenues were down 1% organically at £755.7m, while underlying operating profit fell 2% to £108.9m. PBT increased by 1% benefiting from the reduced financing costs following early repayment of private placement debt in the prior year, while EPS increased by 7% to 16.3p as a result of the improved profitability, lower than forecast tax rate and reduced share count post buyback. Cash generation was again impressive at 96% post capex, with net cash growing further to £274.5m.

Strategy evolution confirmed

CEO Steve Wadey also revealed his strategy for the group based on his immediate impressions for change highlighted at November’s interims. With continued change in security and defence requirements in a constrained environment, QinetiQ defined a vision “to be the chosen partner around the world for mission-critical solutions, innovating for our customers’ advantage”. To enable this, the group has commenced a transformation programme to strengthen leadership, improve efficiency, drive new business wins and increasing R&D, all designed to accelerate growth and create a greater customer focus and competiveness.

Valuation: AGM statement confirmed de-risked story

The AGM update reconfirmed our view of QinetiQ as a de-risked investment with potential catalysts from deploying the balance sheet. Order intake is as expected at this stage, while Brexit implications are minimal with only £20m or 2.7% of UK revenues earned from the EU and a further £20m contributed by the group’s Belgium space business. The next scheduled triennial valuation of the pension scheme is due on 30 June 2017 and may be negatively affected by the fall in gilts; however, we believe the group is in a strong position to re-profile payments if necessary. Our support service-based SOTP fair value remains 237p/share.

Forecast updated for divisional and margin mix

We have marginally updated our FY17 forecasts to reflect our revised expectation of an improved operating profit margin in EMEA Services and lower net finance costs. Our revised forecasts are shown in Exhibit 1 below:

Exhibit 1: Edison's divisional and group forecasts of QinetiQ

£m

FY15

FY16e

FY16a

Difference (%)

FY17e old

FY17e new

Difference (%)

EMEA Services

Sales

625.6

635.0

616.4

-2.9

638.8

622.6

-2.5

Operating profit

93

87.6

93.8

7.1

86.2

87.2

1.1

Margin (%)

14.9

13.8

15.2

+140bp

13.5

14.0

+50bp

Global Products

Sales

138.2

141.6

139.3

-1.6

145.2

145.2

0.0

Operating profit

18.3

18.4

15.1

-17.9

18.2

18.2

-0.3

Margin (%)

13.2

13.0

10.8

-120bp

12.5

12.5

-

Group

Sales

763.8

776.6

755.7

-2.7

784.0

767.8

-2.1

Operating profit

111.3

106

108.9

2.7

104.4

105.3

0.9

Margin (%)

14.6

13.7

14.4

+70bp

13.3

13.7

+40bp

Net interest

-3.5

-0.5

-0.2

-60.0

-0.5

-0.2

-60.0

Underlying PBT

107.8

105.5

108.7

3.0

103.9

105.1

1.2

Adjusted tax

-11.8

-14.8

-12.8

-13.5

-15.1

-15.8

4.6

Underlying tax rate

10.9

14.0

11.8

14.5

15.0

3.7

Underlying profit after tax

96.0

90.7

95.9

5.7

88.8

89.3

0.6

Average shares in issue (m)

630.9

588.5

587.0

-0.3

573.4

573.3

0.0

Underlying EPS (p)

15.2

15.4

16.3

6.1

15.5

15.6

0.5

Source: Edison Investment Research

In addition, following the strong cash performance witnessed in FY16, our FY17 forecast net cash has also improved to £246.2m (previous forecast £191.6m net cash).


Exhibit 2: Financial summary

£m

2013

2014

2015

2016

2017e

Year-end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,327.8

782.6

763.8

755.7

767.8

Cost of Sales

N/A

N/A

N/A

N/A

N/A

Gross Profit

N/A

N/A

N/A

N/A

N/A

EBITDA

 

 

200.7

144.9

135.6

134.7

130.0

Operating Profit (before amort. and except.)

 

 

168.7

113.7

111.3

108.9

105.3

Intangible Amortisation

(14.0)

(3.4)

(2.8)

(2.0)

(2.4)

Exceptional items

(275.1)

28.4

1.0

16.5

0.0

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

(120.4)

138.7

109.5

123.4

102.9

Net Interest

(16.6)

(12.5)

(3.5)

(0.2)

(0.2)

Profit Before Tax (norm)

 

 

152.1

101.2

107.8

108.7

105.1

Profit Before Tax (FRS 3)

 

 

(137.0)

126.2

106.0

123.2

102.7

Tax

3.8

(16.0)

12.0

8.4

(15.8)

Profit After Tax (norm)

122.9

89.8

96.0

95.9

89.3

Profit After Tax (FRS 3)

(133.2)

110.2

105.3

131.6

86.9

Average Number of Shares Outstanding (m)

650.5

651.7

630.9

587.0

573.3

EPS - normalised (p)

 

 

18.9

13.8

15.2

16.3

15.6

EPS - (IFRS) (p)

 

 

(20.5)

16.9

16.7

22.4

15.2

Dividend per share (p)

3.8

4.6

5.4

5.7

6.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

15.1

18.5

17.8

17.8

16.9

Operating Margin (before GW and except.) (%)

12.7

14.5

14.6

14.4

13.7

BALANCE SHEET

Fixed Assets

 

 

626.7

439.4

366.3

320.4

336.0

Intangible Assets

348.2

185.5

122.5

81.4

79.0

Tangible Assets

241.4

233.8

229.6

233.4

251.4

Investments

37.1

20.1

14.2

5.6

5.6

Current Assets

 

 

554.1

597.7

376.6

451.2

457.2

Stocks

25.5

19.8

18.5

19.0

22.0

Debtors

285.6

252.6

159.2

156.2

159.2

Cash

240.4

322.2

184.3

263.5

263.5

Other

2.6

3.1

14.6

12.5

12.5

Current Liabilities

 

 

(486.6)

(437.2)

(372.5)

(384.1)

(386.9)

Creditors

(484.6)

(435.0)

(370.6)

(383.9)

(386.7)

Short-term borrowings

(2.0)

(2.2)

(1.9)

(0.2)

(0.2)

Long-Term Liabilities

 

 

(255.7)

(221.8)

(72.3)

(62.7)

(89.2)

Long-term borrowings

(171.3)

(154.1)

(0.1)

(0.2)

(28.7)

Other long-term liabilities

(84.4)

(67.7)

(72.2)

(62.5)

(60.5)

Net Assets

 

 

439

378

298

325

317

CASH FLOW

Operating Cash Flow

 

 

257.5

141.4

138.9

133.4

105.7

Net Interest

(35.0)

(10.5)

(35.4)

0.3

0.0

Tax

(1.6)

2.9

9.0

27.9

(10.0)

Capex

(17.9)

(18.2)

(24.8)

(28.2)

(40.0)

Acquisitions/disposals

3.2

(2.6)

71.7

25.8

0.0

Financing

(0.4)

(0.5)

(106.8)

(48.6)

(47.0)

Dividends

(20.1)

(26.8)

(31.7)

(32.3)

(37.0)

Net Cash Flow

185.7

85.7

20.9

78.3

(28.3)

Opening net debt/(cash)

 

 

122.2

(74.0)

(170.5)

(195.5)

(274.5)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

10.5

10.8

4.1

0.7

0.0

Closing net debt/(cash)

 

 

(74.0)

(170.5)

(195.5)

(274.5)

(246.2)

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by QinetiQ Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by QinetiQ Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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