Qinetiq Group (LON:QQ) is a business in transformation. It has a new management team, a new campaign based strategy and it is proactively adapting to meet the new defence environment in the UK and US. Solid FY17 numbers saw the first organic revenue growth since 2014, which is encouraging, and management has maintained its expectations for FY18. Underlying momentum is building at the company. Order intake, contract wins and continued organic revenue growth will demonstrate whether or not the new strategy can translate into higher returns.
Growth potential but facing margin headwinds
QinetiQ’s FY17 revenue grew organically by 1% to £783.1m (FY16: £755.7m). Underlying operating profit as reported by QinetiQ of £116.3m (FY16: £108.9m) was boosted by £7.4m of non-recurring trading items. Orders excluding the Long Term Partnering Agreement (LTPA) amendment were up 2% and book to bill improved to 1.3x (FY16: 1.2x). However, the EMEA Services division is facing margin headwinds from the lower baseline profit rate for single-source contracts with the UK Ministry of Defence (MOD). Management issued guidance for “steady progress” in FY18, although optically earnings will fall due to the £7.4m one-off boost to profits in FY17. Our FY18 numbers remain broadly unchanged and we introduce our FY19 forecasts for the first time.
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