Qinetiq controversy cools - but should you buy in?

published 20 February 2006

The flotation of defence firm Qinetiq, currently owned by the government and US venture capital firm Carlyle Group, has been "nothing if not controversial", says Tom Stevenson in The Daily Telegraph, given the massive returns being made by Carlyle (which bought its 31% stake in 2002 for £42.2m and is expected to raise £213m from the float).

But for ordinary investors, who are now, after much fuss, being allowed to make applications for shares through retail brokerages, that is all "water under the bridge". The real question is whether Qinetiq shares will be a good investment or not.

Qinetiq specialises in "top-secret weapon systems", microwave radar, anti-fraud LCD security systems and remote-controlled mine-clearance boats and robots, says Timon Day in Shares. These are all good businesses: in addition to a £5.6bn, 25-year contract with the MoD to provide support services, Qinetiq is also a major supplier to the space industry and has a number of "exciting anti-terrorist and security products".

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Two recent acquisitions have also given it exposure to the US, where defence spending has grown at a compound rate of 7% a year for the past four years, says Stevenson. This now makes up an estimated 30% of sales and the firm is targeting 50%. Earnings are expected to grow by an estimated 15% a year into "the foreseeable future".

That's better than its peers (often shackled by exposure to the highly cyclical commercial aircraft market) and, at the indicated share price on float of 165p to 205p, it more than justifies the company's 14.6 to 17.5 times p/e ratio.

The prospect is not so good if you're looking for income, however the yield will be between just 1.55% and 2.25% says The Times. But if you want growth, says The Daily Telegraph, "the shares look good value up to about 200p". Shares is even more bullish: if you can't get in on the initial public offering, says Day, "buy up to a 15% or so premium on the sale price".

Charles has previously written for the MoneyWeek, giving readers his share tips regularly and covering other topics on the side such as stock markets and the economy. He has also written for The Business, Shares, Investors Chronicle and The Evening Standard, and Charles has presented on LBC and been a guest on BBC One and BBC World. Aside from his journalist background, Charles graduated as a chemist from the University of Oxford specialising in ligand gated ion channels.