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QinetiQ shares tank as new contracts slow in the first quarter

QinetiQ has left its full year forecasts unchanged, supported by revenue growth in its businesses
QinetiQ says the outcome of the UK general election presents challenges

Defence technology company QinetiQ Group plc (LON:QQ.) slumped after saying new orders were slower-than-expected in the first quarter.  

The science and engineering company, which operates primarily in the defence, security and aerospace sectors, said revenue was broadly flat in its EMEA services division but some customer contract award decisions were deferred or delayed.

However, the company still expects an increase in services revenue in fiscal year 2018.

Revenue in the global products arm was also flat in the first quarter but is expected to grow in 2018 on its contracts and a full year contribution from the acquisition of drone targets business, Target Systems. Meggitt sold Target Systems to QinetiQ for £57.5mln in late 2016.

QinetiQ, which was spun out of the UK’s Ministry of Defence, left its full year forecasts unchanged but sounded a cautious note on the outlook.

"The trading environment remains dynamic, particularly in the UK following the recent general election, and presents both opportunities and challenges," the group said.

"QinetiQ has the inherent capabilities and strategy to thrive in this environment despite some near-term unpredictability of order intake."

QinetiQ also continues to predict capital expenditure of between £80mln to £100mln to invest in key contracts. The capex will also support an £1bn amendment to its Long Term Partnering Agreement (LTPA) with the UK Ministry of Defence, announced in December 2016. 

"We now expect a slightly heavier H2 [second half] profit bias this year," said Ben Bourne at Liberum Capital.

"Cost savings to offset ongoing margin pressure from the lower baseline profit rate for single source contracts are ongoing but expected to be worth c £5m vs £20m last year. Optasense opportunities remain but contracts are elusive." he noted.

Bourne has a target price of 270p and rates the shares a hold.

The stock was down 8.8% at 250.3p entering the final hour of trading.

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