By Helen Massy-Beresford in London
From its former guise as a rather sleepy laboratory within the Ministry of Defence – with a touch of the James Bond “Q”s about it – UK technology firm Qinetiq has emerged as a global player in the defence and security market.
The organisation – part-privatised in 2003 with the sale of a 31% stake to US investment house Carlyle, and floated on the London stock exchange in February this year – has just published an impressive set of full-year results, which show a rapidly growing business in the USA.
After a spate of acquisitions and significant contract wins, Qinetiq North America (QNA) – one of three Qinetiq business divisions – now represents around a quarter of the company’s overall business, which broke through the £1 billion ($1.9 billion) sales barrier in the year to 31 March (see chart below). The company wants to double that to half, and, after buying six US businesses in the past two years, chief executive Graham Love expects to add “two or three medium-sized acquisitions” this year. “We do have a pipeline of possible opportunities we’re talking to all the time,” he says.
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In its 2005 results, Qinetiq’s North American sales were just £70 million. Full-year revenues from three of its latest acquisitions – including Ocean Systems Engineering, completed after the end of its reporting period – will alone bump that up from £248 million to £314 million, before any future acquisitions are added.
But despite Qinetiq’s impressive figures – with turnover and pre-tax profits up 23% and 38% to £1.05 billion and £80.1 million , respectively – not everything is going well for the organisation, which began life as part of the UK’s Defence Evaluation & Research Agency. Qinetiq’s share price has dropped by around 15% since the controversial flotation, closing at just under 170p after the publication of last week’s results (see graph).
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The initial public offering – in which the UK government retained a 19.5% stake and Carlyle 10.5% – saw several of its senior managers who held shares make massive windfall profits and the UK government come under fire for allegedly undervaluing the organisation when it originally sold the stake to Carlyle. The whole transaction is under investigation by the National Audit Office, the government’s financial watchdog.
Love retorts that the “pretty solid” set of results should reassure investors and blames the dip in share price to an overall malaise that has affected competitors too. “Compared with other defence stocks we are pretty much in line with our peers,” he says.
But analyst Sandy Morris of ABN Amro is sceptical. “If you start with a high rating, you have to produce results that are not just good. Qinetiq’s are good, but no better than we expected,” he says.
The company’s net debt has risen 32% to £233 million, as a result of its acquisitions and increased pension liabilities. Qinetiq, which employs 9,000 people, is also facing trade union unrest in the UK over a move to performance-related pay and increased employee pension contributions.
The UK defence market – Qinetiq’s traditional customer – and its small but growing Security and Dual Use (SDU) business, where it adapts defence technology for civil, homeland security and space applications, also show considerable promise, believes Love. Its SDU unit grew its turnover by 11% to £134 million and has some “very interesting business opportunities”, with IT security and space showing the most potential, he says. During the year, it won an £8 million contract to host a police web portal and acquired European space company Verhaert Space. The fact that the division numbers UK retailers Tesco and John Lewis among its customers shows the range of markets to which its technology can be applied.
Although MoD defence research spending with Qinetiq dwindled from £189 million to £164 million, as a result of the government opening up research contracts to competition, overall turnover in its Defence & Technology unit (which sells to the MoD) edged up 1% to £670 million. UK operations in Afghanistan and Iraq have provided a strong market for its products. It says it had a “better than 50% success rate” on bids competed during the year. The company is part of the Metrix consortium, which is one of two bidders for the MoD’s Defence Training Review contract. A preferred bidder announcement is due in October and could lead to substantial new business for Qinetiq. It also leaves the door open to “possible tactical acquisitions” in the UK market.
Like all UK defence contractors, Qinetiq has one eye on the UK’s new Defence Industrial Strategy and believes its emphasis on promoting technological upgrades to existing platforms fits its business well. “Most of our competitors start with the mentality of being a prime,” says Love.
Source: Flight International
