Perceived as a sleepy and slightly secretive provider of innovative test and evaluation of military platforms to the Ministry of Defence, QinetiQ (QQ.) has transformed its commercial capabilities under chief executive Steve Wadey.

Management implemented a new growth strategy three years ago with the goal of building an integrated global defence and security business. The prize being to gain a share of the estimated £8bn total addressable market.

The vision is to take advantage the company’s leading position in providing generation and assurance of defence and security services by targeting select countries with a view to generating at least 50% of future revenues from outside Britain.

The company is well on its way to achieving its strategic goals and overseas revenue now represents around 30% of the group, having doubled over the last three years.

The recent first half results demonstrate the magnitude of change achieved with organic growth in orders up 30%, revenue up 10% and operating profit up 8%.

Not only are international markets larger than the UK, but there are organic growth opportunities too, with an estimated compound annual growth rate (CAGR) of more than 4% out to 2023 according to consultancy Jane’s Market Forecast.

In addition to boosting organic growth the company is targeting select acquisitions and recently accelerated its US growth by agreeing to buy MTEQ, a US-based state-of-the-art sensing technology company. This increases the US to 25% of group revenue.

The acquisition creates a leader in advanced sensing, robotics and autonomy, seen as critical building blocks for modern warfare. The operation has around 750 employees and revenues of approximately $300m a year.

MTEQ is expected to deliver low-teens revenue growth and operating margins of more than 7% in year to 31 March 2021 with opportunities to expand profitability with increasing scale.

Meanwhile in the UK, QinetiQ has initiated a two-year transition programme to deliver new processes and ways of working, for example digitalising testing and evaluation to combine live, synthetic and virtual asset threats.

QinetiQ is a high quality business that has achieved an average return on equity of 26.4% over the last five years with stable operating margins around 14%. The business transformation has put the company on a sustainable growth path which should reward shareholders over time.

On that basis a price-to-earnings ratio of 16.1 times March 2021 consensus forecast earnings does not look unreasonable.

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