QinetiQ gains “buy” by Kepler Cheuvreux rating as booked revenue, buyback slowdown

Investing.com -- Qinetiq Group Plc  (LON:QQ) was upgraded to “buy” after analysts at Kepler Cheuvreux in a note dated Monday said the company’s share price had fallen to the lower end of its historical valuation range while the business moves through a period of weak demand in its core markets. 

The brokerage cited soft conditions across the United Kingdom, the United States and Australia but noted that the group’s cost-cutting measures, disposals and an ongoing buyback were supporting earnings despite pressure on revenue growth.

Kepler Cheuvreux said the company has been working through adverse trends in research, development, testing and evaluation markets since the second half of last year, with first-half organic sales falling 3% and year-over-year revenue down 5%. 

The analysts noted that weakness in the U.S. and Australia was the main drag, while underlying EBIT margins, at 10.7%, came in slightly above expectations.

Although market conditions remain subdued, QinetiQ has continued to rightsize its operations.

The brokerage said the group recorded GBP 12 million in exceptional costs tied to workforce reductions in the first half and expects less than GBP 22 million for the full year. 

Management has kept its margin target at about 11%, supported by these cuts and the mix of restructuring and disposals.

The analysts wrote that comparatives will ease in the second half and that QinetiQ confirmed guidance for roughly 3% organic growth for the year, following the weaker first half. 

They also highlighted that around 91% of expected annual revenue was already booked by October, with new contract wins in areas such as maritime, space, sensors and surveillance helping to offset slowdowns elsewhere.

Kepler Cheuvreux pointed to a rebound in organic growth in the second half, which the analysts estimated at 8%. 

They said cost adjustments would lift profitability, projecting EBIT of GBP 215 million before R&D tax credits and approximately 31p in earnings per share, in the middle of the company’s projected 15%-20% EPS growth range.

Despite these expectations, the analysts wrote that QinetiQ’s shares had “erased all the gains of the year” before the results, reflecting concern about delays in contract awards as well as fiscal constraints in core AUKUS markets.

They said the stock now trades at about 13 times earnings, at the low end of its historic price-to-earnings range.

The buyback program was a key factor behind the upgrade. The brokerage said the repurchase activity was ahead of plan and reducing the share count faster than expected, lifting per-share earnings even as revenue remains under pressure. 

With the softer share price, the analysts argued the buyback pays investors to wait for stronger growth to return.

The upgrade to “buy” came as the analysts added that expectations had been “de-risked,” noting that although volatility in recent results warrants caution, the combination of cost savings, high levels of booked revenue and ongoing buyback activity supports the case for upside. Their target price was set at 520p, down slightly from a previous 530p.