Qinetiq EMEA services strength balancing lumpiness concerns

Defence and security technology group Qinetiq maintained its full year profit guidance thanks to strong growth from its services division outweighing uncertainty and lumpy revenues in other markets.

The FTSE 250 company, a former Ministry of Defence spin-out, expressed caution that the current MOD transformation programme is likely to create some “short-term uncertainty” in the domestic defence market but insisted that expectations for the Europe, Middle East and Australasia (sic) division, known as EMEA services, remained “steady” for the full year.

The global products division has shorter order cycles than EMEA services and Qinetiq warned the impact of the US military drawdown meant that bookings have been slower than last year and visibility remained limited.

This division recently made a large step towards diversification outside the defence sector, with its OptaSense product establishing an in-well production flow monitoring system with Shell, using its fibre-optic distributed acoustic sensing (DAS) technology.

The EMEA services group is the current driving force, with utilisation levels and order intake both higher than at the same stage last year, with profitability boosted by a final milestone on an international project as well as “continuing productivity improvements and better project execution”.

Broker Liberum complained that Qinetiq's £150m buyback, initiated in May, has only so far seen £41m bought back so far, implying a completion date of August 2015 at the current rate.

“Whilst the buyback in its current form acts as a technical support to the share price we believe management could look for quicker means of returning cash to shareholders especially as the underlying business continues to generate cash,” analysts suggested.

Moreover, Liberum was “torn” between the hard-to-quantify positive from OptaSense and two “potentially overlooked negatives” in the sustainability of EMEA services margin and the “growing negative working capital”, keeping forecasts and 'hold' rating unchanged.

Shares in Qinetiq were up 1.6% to 227.8p by 11:00 on Tuesday.