Strong revenue gains delivered by QinetiQ’s (QQ.) international business is underappreciated by investors and will continue to drive double digit growth. At some point the market will wake up and value the business on a higher rating.

Defence, cyber security, evaluation and testing company QinetiQ initiated a new growth strategy four years ago to increase the proportion of international sales from 20% to half of the business.

Impressively, international revenues have grown at a compound annual growth rate of 30% a year over four years to reach £213 million, reaching 35% of total revenues.

In the recent first-half update (12 Nov) QinetiQ raised full-year guidance for operating profit to be above £130 million and reinstated medium-term targets for revenue growth in low double-digits and an operating margin in the 12% to 13% range. Analysts have been upgrading their estimates for full year profits.

The company has diversified into faster growing niches by acquisition such as advanced sensory solutions through the purchase of US-based MTEQ and data analytics through the acquisition of Naimuri. MTEQ provides unmanned robotic bomb disposal devices for the US army.

QinetiQ has 30% market share of the UK’s testing and evaluation of military equipment as well as training through a long-term Ministry of Defence (MOD) contract. Management has identified a global market opportunity for its services worth around £8 billion.

The company was formed in 2001 when the MOD split is Defence Evaluation and Research Agency (DERA) into two parts. The larger part including most of the non-nuclear testing evaluation businesses was rebranded QinetiQ, which is derived from kinetic, a scientific word for motion.

In 2003 the company signed a 25-year long-term partnering agreement under which it supplies the MOD with innovative testing and evaluation of military and civil platforms and weapons for land, sea and air. Essentially QinetiQ makes sure equipment works as intended and provides training which sometimes includes simulated battle exercise.

Around 75% of revenues are derived from assurance, evaluation and training with the rest coming from building products.

Critics can justifiably point to earnings growth lagging revenue growth. This will normalise as past investments translate in faster profits growth.

It is a high-quality business with most work delivered on long-term contracts which provide high visibility on revenues as well as good cash generation.

We believe investors have yet to appreciate the growth opportunity and consistent management execution of the strategy.

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