QinetiQ LON:QQ., the FTSE250-listed, Farnborough-based defence and aeronautical company, has had a strong year, and like other defence companies The Armchair Trader has covered, including Cohort LON:CHRT, SRT Marine Systems LON:SRT and RTX Corp NYSE:RTX continued global geopolitical instability augurs well for the sector.
QinetiQ listed in 2007 after six years as a private company spun-out of the Defence Evaluation and Research Agency (DERA) and provides technology and services to both government and commercial clients, with one of their best-known products, the Foster-Miller Talon Robot, being used by coalition forces to disable and remove improvised explosive devices in Iraq and Afghanistan (similar to the robots that co-starred in feature film The Hurt Locker).
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The company is also involved in the drone business, previously manufacturing Zephyr, a solar-powered unmanned ariel vehicle, which was marketed at commercial clients. Zephyr holds a world record for the longest-duration unmanned flight of 26-days and was acquired by Airbus in 2013. However, last month QinetiQ launched Jackdaw, a low-cost, high-performance disposable uncrewed aerial system, designed for swarming and collaborative autonomous operations including crewed-uncrewed teaming, Jackdaw will fulfil multiple missions including reconnaissance, electronic warfare, airborne decoy and threat representation.
QinetiQ is engaged on land, sea and air
The company offers training, testing and research services to the UK Ministry of Defence, managing the Ministry of Defence’s military ranges and is a major stakeholder in the UK Defence Technology Centre, which carries out military science research on behalf of the UK government. The defence company is engaged on land, sea and air, and has a 25-year year Maritime Strategic Facilities Agreement with the MoD to provide strategic maritime facilities and capabilities, including hydromechanic facilities at Haslar, biomedical facilities on the UK’s South Coast, and submarine structures, survivability and shock testing facilities at Rosyth.
QinetiQ also has an international presence with offices in the US and Canada, Australia, the Middle East and Sweden. The company has a path to growth and has offered a consistent 9% organic revenue growth over the last four years – when compared to the defence budgets of its three key markets (UK, US and Australia) this represents double the growth rates of defence spending in these territories and believes that its target market is worth more than GBP30bn.
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Its best performing sector has been UK Intelligence spending, which has delivered 28% compound annual growth rate over four years with revenues in excess of GBP400m. In the US, QinetiQ is a mid-tier intelligence and defence supplier, and with a number of key acquisitions, including last year’s USD590m acquisition of Avantus, a mid-tier data, cyber, and space services and solutions company, has grown into a USD600m revenue business.
The Aukus trilateral security partnership
The Aukus trilateral security partnership between Australia, the UK, and the United States, agreed in 2021 has seen the militaries of these three Anglophone nations collaborate closely on research, development, procurement and operations in the Indo-Pacific theatre and QinetiQ has built a AUD400m revenue engineering, advisory and consulting business in Australia.
As geopolitical uncertainty rises globally, defence spending is increasing and QinetiQ believes it can develop into a GBP3bn revenue business with stable margins promising between 11% and 12% underlying operating profit margin and 15% to 20% return on capital employed. The company states its intention to not over-reach itself and believes this growth can be achieved on leverage of no more than 1.5x.
At the beginning of last month, QinetioQ published a 2Q23 update, saying it had had a strong second quarter, increasing its organic growth rate and profit margins year-on-year and was moderately ahead of analysts ‘expectations. The company took in a record GBP950m of orders bringing it up to 90%.Management highlighted the progress it was making in the US post the Avantus acquisition, winning US Department of Defence contracts in space development and strategic capabilities.
The company opened the week (30th October) at 327.6p and has offered a year-to-date return of -6.4% and a one-year return of -7.3% with its shares ranging between 296p to 382.4p over a 52-week period. The company has a market capitalisation of GBP1.9bn.
QinetiQ will publish its full Interim Results on 16th November 2023. With less jaw-jaw and more war-war the flavour of the last few months, many nations around the world are dusting off their military procurement ledgers and committing to an increase in defence spending, despite the worsening global economic climate, which is surely sweet, sweet music to the ears of QinetiQ and its peers.
