Trading update reflects visibility
QinetiQ Group's (LONDON:QQ) recent trading update highlighted once again the fact that the majority of revenues are derived from the core, long-term business. We feel that it is in keeping with this that the group announced the appointment of an industry veteran to become CEO, with Steve Wadey set to join from MBDA on 27 April 2015. We feel this signals an intention to deliver organic growth from the core and maintain the strict disciplines instilled during the past five years, supported by CFO David Mellors. With the UK set for elections and the prospect of a new Strategic Defence and Security Review (SDSR) later in the year, such focus is welcomed.
Trading update shows delivery continues
QinetiQ’s trading update has shown that it has continued to deliver operational performance and that the organic-plus strategy remains central to the group’s approach. EMEA Services continues to perform well, with order intake up 13% at the interims further supported by new contract wins in the period providing a high level of contracted revenue entering into the final quarter. Global Products continues to be affected by the reduced US military funding for operations that has been a consistent feature of the past two years, with UK product sales partially offsetting the decline again with several new orders won. Cash conversion remains strong and the group is well underway with its £150m share buyback programme.
CEO and CFO together provide continued focus
We consider that the appointment of Steve Wadey as CEO provides a glimpse of the focus that QinetiQ will have in the near future. There remain a number of macro uncertainties facing the business, including the UK election, Orange Book review and SDSR. We believe the combined industry knowledge and experience of the CEO and CFO benefit the group strategically, while retaining financial discipline. With QinetiQ’s experience in delivering cost savings on complex contracts such as the LTPA and CATS, such macro changes may well provide opportunities as well as risks. Focus on delivery is a must in this environment.
Valuation: Supported by the core
We continue to believe that the current valuation of QinetiQ and rating of 13.0x CY15 EPS is supported by the core long-term, cash-generative EMEA business alone (c 85% of FY15e sales). In this scenario, the potential exhibited in the group’s Explore (10%) and Test for Value (5%) earlier-stage businesses effectively comes as an option. Our support service-based SOTP valuation equates to 239p/share.
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