QinetiQ Group PLC (LSE:QQ.) is still preferred to Chemring Group (LSE:CHG) PLC by broker Jefferies after both defence firms recently upgraded full-year guidance.
The broker said there is not much to choose between the two companies in terms of end markets (geographically speaking) but Jefferies thinks QinetiQ has more balance sheet-driven catalysts and a slightly easier environmental, social and governance (ESG) story than Chemring, and a more favourable valuation to boot.
Both companies are under pressure from investors to return capital to investors but both seem currently to favour keeping the cash to take advantage of acquisition opportunities.
Jefferies thinks QinetiQ has scope to return £122mln a year to shareholders until 2025 without unduly affecting gearing.
“This would result in a 2.0x reduction in FY25F PER [price/earnings ratio], a 450bps 4.5 percentage points] improvement in FY25F ROE [return on equity] and a distribution yield of 8.9%.
“As CHG is still in net debt it has less capacity but could, under the same constraints, sustain a buy-back of £12mln pa which would improve FY25F PER by 0.5x. Its distribution yield would be 3.6%,” the broker said.
Jefferies has increased its QinetiQ target price to 405p and sticks with its ‘buy’ recommendation. Chemring stays at ‘hold’ but the price target is increased to 350p.
QinetiQ currently trades at 343p and Chemring at 368.5p.