Defence technology firm QinetiQ Group (LSE: QQ) cheered investors last Friday with the news that it had secured a £1bn contract amendment to deliver modern air ranges and test aircrew training for the Ministry of Defence (MoD). The deal is effectively an extension to the Long Term Partnering Agreement (LTPA) from the MoD under which Test & Evaluation services have been delivered since 2003, committing approximately half the core LTPA revenues until 31 March 2028.
Not getting excited
Under the agreement the Farnborough-based engineering firm will modernise and operate the air ranges at MoD Aberporth and MoD Hebrides, and test aircrew training through the Empire Test Pilots’ School at MoD Boscombe Down. The company believes that efficiencies delivered through this programme will enable future MoD and QinetiQ investment in developing further world-class Test & Evaluation services.
So great news for QinetiQ fans, but is that enough to get new investors on board the FTSE 250 firm? Well, despite the magnitude of the contract win, the company’s shares ended the day pretty much where they started, and so far the market hasn’t shared management’s enthusiasm or excitement with regards to the contract win. It was much the same last month when the company issued positive interim results for the first half of its financial year.
Positive results
For the six months to the end of September QinetiQ reported an increase in orders to £376.8m compared to £228.4m for the same period last year. This was helped in no small part by the award of a £109m 11-year renewal from the MoD for the Naval Combat System Integration Support Services (NCSISS). But again the news seemed to go unnoticed, with the market refusing to get excited about the half-year results.
Sure, the contract wins will boost the group’s top line, but analysts are expecting underlying profits to come in 4% lower for the full year to the end of March, with no growth in sight until at least FY2019. For that reason I’m rating the shares as a hold at best, and I would suggest new investors wait for a return to growth before diving in.
Ongoing problems
Another hi-tech engineering firm I’m refusing to get excited about at the moment is Senior (LSE: SNR). The Hertfordshire-based group has been under severe pressure this year shedding a quarter of its value as on-going problems in its Flexonics division were compounded by a slower-than-expected ramp-up of new programmes for its Aerospace business in the third quarter.
The Flexonics division, which makes heat exchange solutions for the energy generation and diesel engine markets, has struggled throughout 2016, suffering from softer truck and off-highway vehicle markets, plus the downturn in oil and gas sector activity.
October’s profit warning brought the share price to near five-year lows but I still don’t see the shares as a good contrarian play with earnings forecast to shrink 25% for the full year ending 31 December. I would want to wait until the troubled Flexonics division returned to good health before giving the shares another look.
