QinetiQ Group
Written by
QinetiQ Group |
De-risked with investment catalysts |
AGM trading update |
Aerospace & defence |
10 August 2016 |
Share price performance
Business description
Next event
Analyst
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 |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
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
|
|