The company Qinetiq was created in 2001 when the Ministry of Defence split its defence testing and research agency in two, retaining its science and technology laboratory but spinning off the larger evaluation and non-nuclear elements and bringing in Carlyle, the American private equity investor, to buy a stake.
After a messy set of rows about its valuation, fees for advisers and large share windfalls for senior executives, Qinetiq was listed on the stock exchange at 200p a share in 2006. Its valuation of £300 million has since swollen to more than £1.6 billion.
At the centre of the newly formed Qinetiq was a 25-year partnership agreement, initially signed with the MoD in 2003 (so due to expire in 2028), under which the company provided testing and evaluation services for military systems, weapons and components on land, at sea and in the air.
In its modern guise, Qinetiq is considerably more diverse, effectively using this contract as a launchpad to provide defence research and technology services in the United States, Australia and other countries, such as Germany. The company has expanded its range of products, for example designing and manufacturing robots for use by the US armed forces. As well as testing military kit, it trains recruits so that they know how to use it.
As it stands, though, the British government remains its largest customer, accounting for just over 60 per cent of revenues. With the aim over the longer term of making the UK account for no more than half of its earnings, Qinetiq has targeted overseas markets and new business areas, in particular in America, the world’s largest defence market with an annual budget of more than $700 billion.
Perhaps slightly counter-intuitively, its long-term partnership agreement with the MoD can actually help it here. This month it agreed terms with the Whitehall department that secure £1.3 billion of revenues between now and the end of March 2028, when the present contract expires.
Under the deal, Qinetiq will modernise all 16 of the MoD’s critical defence sites, including through the provision of noise and electromagnetic measurement systems to improve the ability of ships, aircraft and submarines to avoid detection. As well as training personnel, it will test electronic warfare systems and other weaponry, investing £180 million of its own capital as part of the process.
Guaranteeing a domestic revenue stream for the next nine years is useful, clearly. However, operating such sophisticated facilities means that the company is also in a position to attract military customers from overseas to come and use them, in the process further lifting international earnings. For example, it has already twice used a site in the Outer Hebrides to host missile-testing by eight Nato countries as part of an excercise known as Formidable Shield.
There is an obvious question about what happens when the contract expires in nine years’ time. In truth, it’s likely that Qinetiq will have plenty of opportunity to pitch for a new deal, which it would be well placed to win, not least because of its technology prowess but also as likely competitors such as BAE Systems or Meggitt will be conflicted in having supplied some of the hardware that gets assessed.
Qinetiq shares, up 2½p, or 0.9 per cent, to 290p yesterday, trade for just under 16 times Barclays’ forecast earnings for a yield of 2.4 per cent. Perfectly respectable.
Advice Hold
Why Increasingly diverse group whose expertise is getting it into new markets
McColl’s Retail
If there is a single word that might justify the investment case for McColl’s Retail, it’s convenience. While the high street might be dying as shoppers move online and fill their car boots with groceries from the big out-of-town store, consumers will always need that useful shop around the corner to nip out to buy the things they forgot, particularly out of hours. At least, that’s the thinking.
McColl’s Retail was founded as a single store in Scotland in 1901 by Robert Smyth, an international footballer, and his brother. It now operates 1,253 convenience stores across the UK, after buying 298 from the Co-operative Group in 2017, plus a further 303 newsagents under the Martin’s brand. It is the largest operator of Post Offices in Britain, with about 600 branches or counters in stores across its network.
Disaster struck only days into the company’s most recent trading year when, in November 2017, Palmer & Harvey, the wholesaler and its main supplier, buckled under its debts and filed for administration.
The collapse disrupted supplies to 700 McColl’s stores and was behind a 1.4 per cent fall in like-for-like sales and a drop in margins last year. It forced the retailer to use a stop-gap supply chain for nine months and led it to accelerate its planned move to use Wm Morrison as the supplier to 1,300 stores by three months. Pre-tax profit slid from £18.4 million to £7.9 million in part because it took the cost of setting up with Morrison’s as a single hit.
While McColl’s is behind the worst of the fallout, it is facing several other pressures, from an increase in the national living wage and higher energy bills to a big rise in its annual rent bill after it sold and leased back many of the freeholds it acquired with the Co-op shops.
With consumers under financial strain and competition intense, the company is already forecasting that profits this year will be only marginally higher than last time. The convenience store market may be alive and well — and forecast by IGD, the food and grocery charity, to reach £47.2 billion by 2023 — but McColl’s Retail’s share price is not. Flat at 80p yesterday, the shares trade for only 6.9 times Numis’s forecast earnings for a prospective yield of 7.9 per cent.
There is nothing in sight that might send them higher.
Advice Avoid for now
Why Trading under pressure with costs on the up
