As QinetiQ Group PLC (LSE:QQ.) derives the highest share of revenue from the UK Ministry of Defence, as the outlook for the country's defence budget has increased materially in recent weeks, this offers "an attractive backdrop for sustainable growth", says Berenberg.
The defence technology group, which was in fact spun out of the MoD, gets around 57% of its sales from the UK defence ministry but has seen its shares hit by concerns on the outlook on US public spending.
This has weighed on the share price and valuation so far this year, but appears "overdone", in Berenberg's view.
The shares are available for 13.8 times 2025 earnings, a 20% discount to European defence peers.
Berenberg raised its share price target to 610p and reiterated a 'buy' recommendation.
"The company is... well positioned to benefit from the announced plan to increase UK defence spending to 2.5% of GDP by 2027, and the ambition to increase this further to 3% of GDP in the next parliament (up from 2.3% in 2024)," the Berengerg analysts said in a note to clients.
They forecast QinetiQ to benefit from 8% compound annual growth over 2025-34 in UK procurement spending.
The FTSE 250 group's US exposure is something to watch and has weighed on the shares in recent months, given uncertainty linked to the impact of Elon Musk's so-called 'department of government efficiency' (DOGE) and planned funding cuts for certain defence programmes.
The US accounts for c20% of QinetiQ’s revenue and the analysts estimate that the company’s exposure is "diversified across different agencies – including the US Intelligence Community, the US Army and Homeland Security. However, risk is not simply tilted to the downside – certain areas of QinetiQ’s business are poised to benefit from higher funding, in our view, including its exposure to border security programmes. This is not reflected in the valuation of the shares."