Qinetiq on Thursday unveiled a sharp drop in pre-tax profits as operating margins shrank by a third. Yet investors goosed the shares
higher by seven per cent after learning that net cash was up by two thirds and that full-year guidance had been maintained. Clearly, some shareholders believe they are due a return of cash. Nevertheless, the company is still in the midst of a restructuring which will probably see it hive off its low-margin US business - perhaps for an amount north of 200m pounds.
A disposal would, however, leave a question over whether a smaller Qinetiq could stand alone if the industry continued to deteriorate. It used to be the research facility of the UK's Ministry of Defence, although its growing focus on commercial customers is a strength. But the downturn could spark consolidation among second-tier contractors. On a full-year 2014 price/earnings multiple of 14, at the high end of the UK defence sector, investors have priced a lot of ifs into Qinetiq's shares, says the Financial Times's Lex column.
Once account is taken of one-offs and timing differences National Grid's interim operating profits were only 1% lower than a year ago. The US was held back by charges relating to payment processing problems - which are expected to fall in the second half - and the 9% rise in finance costs which should also revert at least partially in the second half. More importantly, the energy infrastructure supplier has reached agreements with regulators in the US and UK on its long-term pricing regime. That certainty will allow the company to invest £3.5bn to fund a 6% growth in its asset base.
Overall, with falling profits, it would be easy to say Thursday's was a poor set of results, but there were enough positives - both on the balance sheet and in terms of the regulatory outlook - to see through the first-half slide. The longer-term investment case is now well supported for this income-generating favourite. Hold, says the Daily Telegraph's Questor column.
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