QinetiQ rallies on Berenberg upgrade

QinetiQ Group shares gained on Monday after Berenberg upgraded the defence technology group's stock to ‘hold’ from ‘sell’ and lifted the target price to 275p from 210p.

“CEO Steve Wadey’s growth strategy (outlined in May) is clearly progressing, with meaningful capital now committed to contract investment and acquisitions (the first in his tenure),” Berenberg said.

The broker said its previous ‘sell’ rating was due to the risk of falling margins in the company’s core Europe, Middle East and Africa services business, reflecting lower profit rates on UK Ministry of Defence (MoD) single-source contracts.

While it remains a risk, Berenberg said the impact is “less severe than we had envisaged” and is mitigated in the longer term by emerging growth opportunities.

Under QinetiQ’s new strategy, the company is deploying its cash reserves to drive organic growth, Berenberg added. The group is investing more in contract capital expenditure, including the recent amendment to the £1bn of the long-term partnering agreement with the MoD for test and evaluation services. The company also acquired Meggitt Target Systems for £57.5m in December.

“These developments represent a significant change in the group’s capital allocation strategy,” Berenberg said.

“However, even after accounting for these investments, the balance sheet remains strong (we estimate c£180m net cash in 2017 and 2018), and hence we see potential for more of the same in the coming years.”

The shares are “fairly valued” and trade, on a price-earnings ratio basis, at a 10-15% premium to the average of UK defence companies but at a slight discount to US technical services peers.

Shares rose 1.26% to 264.30p at 1005 GMT.