I see engineering as a quintessential part of Britain’s industrial heritage, and it’s pained me to see companies in that sector suffering over the past few years of economic squeeze. But it’s nice to be able to report on some upbeat results now.
Lots of cash
Shares in defence and security specialist QinetiQ (LSE: QQ) suffered during the banking-led recession, but over the past five years they’ve put on an impressive 109% to reach 244p. Earnings have been a bit erratic over that time and dividends have been yielding only around 2.5%, though share price valuations have remained unstretched.
And in a first-half report today, the firm announced a statutory after-tax profit rise of 18% to £49.5m, with reported earnings per share up 20%. Underlying figures were a little lower than that, with a profit rise of 5.3% and EPS up 7% to 7.8p, but that’s still impressive progress and suggests the full year could turn out better than the City’s analysts currently expect.
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I’m impressed by QinetiQ’s cash-generation abilities, with underlying net operational cash flow up 8.5% to £50.9m and the firm’s underlying cash conversion ratio up to 98% from 94% a year previously. I like the visibility of a strong order book too, with 94% of the firm’s expected 2017 revenue under contract and a number of key order renewals in the bag.
In recent years, QinetiQ has been focusing on longer-term customer retention and competitiveness, and chief executive Steve Wadey reckons the plans are “on track with transforming the company.“
QinetiQ shares are on a forward P/E of 15.7 based on current full-year forecasts, but I wouldn’t be surprised to see those upgraded a little in the light of these interim figures. Still, on the face of it and with dividends only expected to yield around 2.5%, that might not look like a bargain rating.
But strong cash flow and net cash of £271.2m swing it for me, and I rate QinetiQ shares as good value.
Strong outlook
WS Atkins (LSE: ATK) shares have been spiking of late, and the engineering and defence firm has also reported increased first-half profits today.
Perhaps best known as a contractor for the London Underground, Atkins revealed a 14% rise in underlying pre-tax profit to £63.6m, with underlying EPS up 12.6% to 48.2p (although statutory figures including one-offs reduced that to losses on both measures).
A net cash position of £141m a year previously did turn into a net debt of £90.3m, but that was down to the acquisition of EnergySolutions’ project, products and technology business — so nothing to worry about.
Chief executive Uwe Krueger told us that “the near term outlook in our UK and North American businesses is particularly positive.” And the firm’s global spread with operations across Europe and the Middle East too is one of the things I like — it should help insulate the company from local shocks like Brexit.
Mr Krueger went on to tell us that Atkins’ full-year outlook is unchanged, which suggests we’ll see further earnings growth on top of strong growth in each of the past five years. That would put the shares on undemanding P/E multiples of 13 to 14 with dividend yields of around 2.5%, which I again see as good value — even with the shares up 188% in five years to 1,648p.
