Investment Column: Qinetiq has the firepower to trade higher

Shanks; Endace
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The Independent Online

Our view: Buy

Share price: 112.3p (+0.3p)

We have been fans of Qinetiq since last summer. Although rhetoric of austerity and the drive for public-sector cuts – including defence cuts – did not bode well for the sector, we decided to take a speculative punt on Qinetiq in the hope that the new chief executive, Leo Quinn, would succeed in turning around the business, which, it must be said, has been through some pretty hard times.

Fast-forward to yesterday and Qinetiq seems to be well on the way to more than justifying our faith.

The company posted better-than-expected full-year figures, with underlying operating profits climbing by 21 per cent to £145.4m, against analyst hopes of around £140m.

But that wasn't all. Qinetiq said it had slashed its debt burden to a manageable £261m from £457m. And it also cheered income investors by announcing that it would resume paying dividends.

The company had suspended payouts for a year, as it went about restructuring itself into three divisions: US services, UK services and global products. The services businesses are the bread and butter of this firm, and face pressures as governments cut back on spending.

However, despite pressure on revenues, we think that the restructuring story still holds water. Mr Quinn is clearly making good progress with his 24-month plan of putting the business on an even keel. The first 12 months appear to have gone well, and should address any concerns about his ability to execute the strategy.

The bears will no doubt highlight that the trading environment remains challenging. Qinetiq conceded as much yesterday.

But the fact remains that the wider sector faces the same challenges. Qinetiq stands out, as it offers the prospect of upside gains if the restructuring continues to progress well. That, and the fact that the shares trade on under seven times forward earnings, make this a confirmed buy.


Our view: Buy

Share price: 121.3p (+2.7p)

It may be involved in waste management, but Shanks was nonetheless smelling sweet yesterday after the release of its full-year results. As well as beating expectations, the group also upped its dividend by 8 per cent to 3.25p a share.

This was impressive given the headwinds the company has faced this year. The main issues have been seen in the Netherlands, which makes up for almost 70 per cent of its profits, where the construction sector has suffered a significant downturn.

Things look promising for the future, though, and Shanks' outlook statement was more positive than before, with the group saying that trading over the past few months offered "encouragement that the market for our services is improving".

But it is in the UK where the real opportunities seem to lie. We currently lag well behind Europe in cutting the waste that ends up in landfill sites, and Shanks is hoping to benefit from government efforts to change this.


Our view: Buy

Share price: 465p (unchanged)

New Zealand-based Endace is called in by clients to monitor networks and help to protect against cyber attacks similar to those that recently devastated Sony's PlayStation Network. And judging by its full-year results released this week, business is brisk.

Revenues rose by a quarter to $38.4m for the 12 months to the end of March. Pre-tax profits were up from $400,000 the previous year to $2.9m.

The company was certainly feeling punchy when it came to the outlook. "The board looks forward to the coming financial year with considerable confidence that the company has the right products, a talented executive team, and an expanding market," it said, not shedding even the slightest hint of modesty or caution.

It pointed to governments increasing spending on cyber security to protect against terrorism, as well as corporations doing the same. Also, as financial firms still have to meet stringent regulation, compliance and risk-management criteria, prospects are also "very exciting".

Ordinarily, the fact that a stock trades on multiples of 2.4 times enterprise value to sales would be enough to make us buy. Endace has more to offer, and alongside the business prospects, there is the chance of bid activity, according to analysts.