Share tip of the week: top-notch defence firm
By
Paul Hill Oct 09, 2009
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Investors looking for recession-resilient stocks should look no further than Qinetiq. The group was originally born out of the Ministry of Defence's (MoD) research laboratories, and is jam packed with proprietary technology that would make even 'Q' from the James Bond films green with envy.
Unlike many of its peers, it is not just a hardware manufacturer, but is also a service company with a meaty £1.2bn order book.
In September, the firm's Metrix consortium – armed with a £12.5bn, 25-year private finance initiative deal – was given the green light to construct a new academy to train the combined armed forces in south Wales. The project is expected to be completed in 2010, with the new Defence Technical College providing specialist training on a dedicated 1,000-acre site for up to 3,000 students.
But Qinetiq also generates substantial revenues elsewhere. It has a long-term partnering agreement with the MoD (worth an estimated £4.5bn over the next 20 years), and provides it with testing services.
Qinetiq also owns an armoury of clever science that has been tried and tested in the harshest of military environments. So the board has set up a Ventures team (albeit presently loss-making to the tune of £14m per year) to sell this knowledge in other fields, such as cyber-crime and nanotechnology.
Qinetiq (
LSE: QQ
), tipped as a BUY by HSBC
Take the firm's expertise in robotics and unmanned aircraft. Not only does it provide battlefield robots, such as Talon, to the US army, but it has also begun selling spin-off products, such as Tarsier (an airport-runway hazard-detection system) and Borderwatch (a people-screening and detection system). Geographically, the firm is also well spread, with the UK MoD representing 37% of sales, North America 47% and the rest of the world 16%.
The City is forecasting revenues and underlying earnings per share (EPS) of £1.7bn and 17.3p respectively for this year, rising to £1.8bn and 18.8p next. This puts the shares on attractive p/e ratios of 8.1 and 7.5, with a 3.5% dividend yield. Furthermore, if the Venture unit's losses are stripped out, the 2009/2010 EPS would rise to 18.7p, making the valuation even more appealing.
With a large chunk of the business in America, foreign exchange is an issue. So too is Qinetiq's net debt of £466m and £76m pension deficit. There are also always concerns when dealing with governments (such as order delays after elections) – especially if there is a prolonged slowdown in defence spending. But it seems unlikely cuts would be too deep in areas such as intelligence gathering and robotics, in which the firm has real strengths.
In short, with a treasure-trove of top-notch science, Qinetiq is a safe bet for long-term investors. HSBC has a 12-month price target of 190p. Interims are out on 25 November.
Recommendation: LONG-TERM BUY at 140p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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