Profit rise keeps Qinetiq float on track

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Qinetiq, the defence technology group which was hived off by the Government three years ago, remains on course for flotation after reporting a 33 per cent increase in operating profits last year to £70m.

The company, formerly part of the Defence Evaluation Research Agency, was valued at £500m when the US private equity group Carlyle bought a one-third stake in December 2002. But the forthcoming stock market listing, expected in the next six to nine months, is likely to put a price tag on Qinetiq of nearer £1bn.

The sale will be the first public flotation of a state-owned business since Labour came to office eight years ago. It is likely to take the form of a partial sell-off, reducing the Government's holding in Qinetiq to less than 50 per cent. At present the state holding is 56 per cent with employees holding a further 13 per cent, although Carlyle has held a majority of the voting rights in the company since the original public-private partnership in 2002.

A report last year by the investment bank Morgan Stanley, which has been hired to advise the Government, concluded that Qinetiq was ready for flotation.

Sir John Chisholm, Qinetiq's chief executive, declined to comment on the timing of any flotation, saying that was a matter for the company's shareholders. But he added that last year's profit growth was in line with the group's business plan.

The increase in profits was driven by Qinetiq's expansion into the US, the biggest market in the world for defence-led technology. The two American acquisitions which it completed last year contributed £78m of sales and £9.1m in operating profit.

The UK Ministry of Defence remains Qinetiq's biggest customer, accounting for three-quarters of last year's £872m turnover, thanks in part to a long-term agreement to provide testing and evaluation services on MoD sites.

But Sir John forecast that in five years' time, sales in the US could be equal to those from the UK as it continued its drive to grow its US presence. The company has up to £300m to spend on further acquisitions although Sir John said that a lot of the growth could come from its existing businesses.

Qinetiq and its predecessor organisation, Dera, were responsible for inventions such as carbon fibre, microwave radar, the liquid crystal display and Chobham armour.

In recent years it has patented a new millimetre wave technology which is now being experimented with as a means for detecting suicide bombers in locations such as airports. The technology is already in operation in the Channel Tunnel, where it is used to screen lorries to try to detect the presence of asylum seekers.

Last year saw a switch away from pure research into so-called dual-use technologies towards technology exploitation. This led to 250 redundancies amongst Qinetiq's 11,000-strong workforce and a £25m restructuring charge. This was more than offset, however, by a £29m gain from disposals and £17m gain from the sale of intellectual property rights. At the pre-tax level, profits rose from £47.6m to £82.3m.