Barclays Capital has updated its forecasts and repeated its positive stock recommendation for the defence contractor QinetiQ Group PLC (LSE:QQ.).
It cited recent M&A activity and material tax adjustments for the changes to its numbers.
The bank also repeated its "overweight" recommendation on QinetiQ's stock and has set a share price target of 465 pence.
Currently, the company's shares are valued at 350 pence, up 1.7% on the day, giving it a £2bn market capitalisation.
In a research note, Barclays explained that the changes to its forecasts were due to the completion of QinetiQ's acquisitions of Avantus and Air Affairs, as well as the disposal of its Space division.
Enhanced CAGR
The bank expects these changes to result in a 4%/13%/15% uplift in earnings per share (EPS) for the next three financial years, offering investors a 13% five-year EPS compound annual growth rate.
The bank also expects the company's business to reach its £2.3bn revenue target in 2027, or potentially earlier.
One of the key drivers of the changes to Barclays' forecasts is the recent completion of QinetiQ's acquisition of Avantus Federal, a US-based provider of cyber, data analytics, and software development services to the US Department of Defense, Intelligence, and HLS customers.
The $590m all-cash deal represents around 20% of QinetiQ's market capitalization. The deal also includes a $70m tax asset, which Barclays expects the company to utilize in the short term.
R&D tax credits
Barclays also expects QinetiQ to benefit from a tailwind in the UK Government's budget, which cited an increase in the rate of the Research and Development Expenditure Credit (RDEC) from 13% to 20%, starting in April 2023.
This is expected to provide a material benefit to the company's effective tax rate, although the bank anticipates this rate will rise slowly over time due to changes in the geographic mix of the company's profits.
Overall, Barclays expects QinetiQ to be in a strong position to continue with bolt-on acquisitions in the future, partly or entirely funded by free cash flow, thanks to its balance sheet deleveraging and a higher interest rate environment.
The bank has rolled its valuation forward to 2025 and applied a nine-times enterprise (EV/EBITDA) multiple, which it believes is in line with its discounted cash flow analysis.
Of the eight banks and brokerages tracked by Proactive as following QinetiQ, five are positive on the stock. The consensus price target is 416p.