QinetiQ has now released their interim results for the year ending 2020.
Revenues increased when compared to the first half of last year as a £900K fall in property rental income was more than offset by a £49.2M growth in EMEA Services revenue and a £17M increase in global products revenue. There was a £2.5M beneficial swing to a profit on the disposal of plant and equipment but depreciation was up £3.2M, share based payments increased by £1.2M and other underlying operating costs grew by £55M. There was a £13.3M profit on the disposal of a property, and a £2.6M decrease in property impairments but acquisition costs increased by £1.2M and there was a £2M increase in the amortisation of acquired intangible to give an operating profit £20.7M higher. There was a £900K fall in the pension scheme financial income and a £1.1M fall in investment sale gains but tax charges increased by £6.5M to give a profit for the period of £62.1M, a growth of £12M year on year.
When compared to the end point of last year, total assets increased by £41.7M driven by a £36.4M growth in the pension surplus, an £11M increase in property, plant and equipment, a £10.4M growth in cash, a £9.1M increase in inventories and a £3.7M increase in goodwill, partially offset by a £30.2M decline in receivables. Total liabilities decreased during the period was a £14.9M increase in deferred tax liabilities was more than offset by a £34.9M decrease in payables and an £8.5M fall in current tax liabilities. The end result was a net tangible asset level of £610.8M, a growth of £68.9M over the past six months.
Before movements in working capital, cash profits increased by £8.7M to £82.1M. There was a cash outflow from working capital, but this was much less than last time and after tax payments increased by £4.1M and finance lease payments grew by £1.5M the net cash from operations came in at £62.9M, a growth of £16.5M year on year. The group spent £7.1M on intangible assets and £33.3M on fixed assets but brought in £14.1M from the sale of property, plant and equipment to give a free cash flow of £36.5M. They spent £25.5M of this on dividends and a small amount on some other bits to give a cash flow of £10.4M and a cash level of £201.2M at the period-end.
The underlying operating profit in the EMEA Services division was £46.2M, a growth of £5M year on year which includes a £1.6M benefit a gain on sale of aircraft and spares which will not repeat, and a £2.1M contribution from QinetiQ Germany and Inzpire which were acquired in the second half of last year. Excluding these and forex movements, profit was up 3% with margins impacted by the higher volume of work under the EDP contract. Orders were up 57%, driven by a £67M contract for the UK Robust Global Navigation System and £60M orders under the Engineering Delivery Partner contract. Revenue increased by 9% on an organic basis as a result of work delivered under EDP and the Battlefield Tactical Communications and Information Systems contract.
In Air and Space in June the transformed Empire Test Pilots’ School was opened and is now equipped to provide world-class test aircrew training. Building on this investment, they have experienced strong demand for both long and short ETPS courses, especially from international customers. There were £60M of orders under the EDP with an £11M contract to provide independent technical evaluation services on the F35 aircraft to ensure it meets the requirements of the RAF.
Within Maritime, Land and Weapons, the group is now in a two year transition period of the LTPA to deliver the new modern ways of working covered under the contract. Key milestones have been agreed with the customer and they have met the first two of these on time. They supported the delivery of Formidable Shield 2019, a live fire exercise testing integrated air and missile defence capabilities led by the US Navy. They are also awarded a £19M contract to provide electromagnetic and acoustic mapping services to the Royal Navy through the LTPA contract. This will reduce the detectability of their ships and submarines.
Within Cyber, Information and Training the CIT business secured a £67M contract with the UK MOD to develop secured satellite navigation receivers. Under the UK Robust Global Navigation System programme, they will deliver positioning, navigation and timing capability to the MOD. They also booked £16M orders under a new £20M contract to provide assurance and testing services on a new air to ground communications system for all police and air ambulance aircraft. The ongoing delivery of BATCIS where the group is supporting the development of next gen tactical communication and information systems in progressing well and made a notable contribution to a good performance in the first half.
Within the international business they group delivered a positive performance with strong growth in orders, revenue and profit. Performance in Australia has been strong, underpinned by their status as a major service provider to the government in partnership with Nova. The integration of QinetiQ Germany following the acquisition in October 2018 is proceeding well. As part of the LTPA air range modernisation programme agreed in 2016, they have secured a €10M contract to provide range clearance services in the UK over the next nine years.
The underlying operating profit in the Global Products division was £13.5M, an increase of £3.1M when compared to the first half of last year driven by increased sales of higher margin products in QinetiQ Target Systems. Orders were stable and revenues were up 17% driven by QinetiQ Target Systems. Organic revenue was up 14%.
QinetiQ North America saw a strong performance primarily driven by robotics orders. The business completed the first set of deliveries under the Common Robotic System programme of record. In larger unmanned ground vehicles, the business has partnered with Pratt & Miller to submit a bid based on a variant of the Expeditionary Modular Autonomous Vehicle into the competition for the Robotic Combat Vehicle programme. In the maritime domain, they were awarded a contract by General Dynamics Electric Boat to design, test and qualify a next gen Electronic Grounding Unit for Virginia Class submarines.
OptaSense performance was positive with growth in revenues and profits. Orders declined slightly, however, following a tougher comparator and slippage of confirmed orders into the second half of the year. While the oil and gas market remains challenging, they have seen encouraging progress in the uptake of OptaSense in key international basins. Demand for linear assets protection, pipelines, perimeters and transport also continued to improve with significant uptake in North and South America.
Within Space Products, the group opened a new higher grade clean room facility in Belgium which enables them to produce up to four major products at any one time and will support growth in satellites and docking systems production. Leveraging these new facilities, they were awarded a €9M three year contract to build equipment that will support experiments in the International Space Station.
Within EMEA Products QinetiQ Target Systems delivered a strong performance, doubling orders and delivering a 50% increase in revenue. They developed two new products. The first is a Banshee target that replicates fast flying jets and the group have already seen strong customer interest. They also released the air-launched Rattler target, a low cost supersonic target used to replicate anti-radiation missiles and supersonic threats, and they have received the first orders of this product form the UK Royal Navy.
Beyond QTS, they were awarded a £3M contract to conduct research into the latest vehicle technologies to boost the performance of the UK Future Ground Combat Vehicles. This project will focus on solutions for ground vehicle mobility exploiting the potential provided by electric drive systems. They are seeing encouraging demand for their broader product portfolio, including Obsidian, their counter-drone technology designed to detect, ID and track small drones and Bracer, their secure commercial satellite communications system.
Shortly after the period-end the group announced the acquisition of MTEQ, a US provider of advanced sensing solutions. It is expected to close towards the end of the year. The group will pay $105M on completion with an earn out of $20M payable in cash and shares dependent on performance over three years.
Going forward, the board are maintaining expectations for full year operating profit with high single digit revenue growth.
At the period-end the group had a net cash position of £173.5M compared to £161.3M at the year-end. At the current share price the shares are trading on a PE ratio of 17.6 which increases to 17.9 on the full year consensus forecast. After an increase in the interim dividend the shares are yielding 2% which is forecast to remain the same for the full year.
Overall then this has been a solid performance from the group. Profits were up, net assets increased and the operating cash flow improved with a decent amount of free cash flow produced. EMEA Services has increased profit, mainly due to the acquisitions, with a more modest underlying increase. Global Products performed well, mainly due to the Target Systems business. The shares look pricey with a forward PE of 17.9 and yield of 2% but this does not take into account the large amount of cash on the balance sheet. I’m considering buying in here.