Qinetiq, the defence technology firm spun out of the Ministry of Defence's research arm, is under pressure today on concerns about slowing growth and a possible fundraising.
Analysts at UBS have reduced their rating on the company from neutral to sell, and cut their price target from 150p to 130p. In the market QinetiQ has lost 6.7p to 134.8p, making it the biggest faller in the midcap index. UBS said management had some tough choices to make, given the difficult trading environment, but they could prove costly:
Investors should welcome any management action that effectively deals with the tough trading environment. However, as we have noted in the past, restructuring at Qinetiq can be very expensive. The historic cost-to-saving ratio has been 3-to-1. We believe that new chief executive officer Leo Quinn will act to appropriately size Qinetiq for the level of trading in its end-markets. To that end management have a number of options at their disposal. However, we believe the risk is high that a restructuring of QinetiQqcould be very expensive in cash terms – raising the prospect of a cash outflow. This could have material negative implications.
Given a trading environment that we believe is not improving, we cut our 2011 estimated earnings per share by 20% and 2012 earnings by 10%. We believe we are around 5% below recently revised consensus expectations.
We believe market expectations are too high on (a) earnings (b) dividends and (c) the prospect of a strategic plan announcement.
We also believe the market is under appreciative of the likelihood of an equity raising, which is a possibility. On balance, given the above, we believe a sell rating is now appropriate.
