Qinetiq shares slump on profit warning after contract delays

(Sharecast News) - Shares in QinetiQ slumped by a fifth on Monday as the UK defence contractor said it would take a £140m impairment charge amid persistently tough market conditions and contract delays. The company said it now expected organic revenue growth of 2% this financial year, down from the "high single digit organic revenue growth" forecast in a previous warning in January. There would also be a non-cash charge of up to £40m due to US operations, "predominantly in our legacy US operations".

It also announced a US restructuring to support future growth after appointing Tom Vecchiolla to lead the division in January.

Underlying profit margins were forecast to be about 10% lower from previous expectations of "stable" at the 12% reported in the last financial year

Monday's update comes amid plans by the UK government to boost defence spending in response to the US administration's pivot towards Russia. Despite the balance sheet charges, Qinetiq said it would extend its share buyback by up to £200m.

"In addition, recent geopolitical uncertainty has impacted our usual fourth quarter weighting to higher margin product sales from the US," the company said in a trading statement.

"Longer term, the underlying strength of the group coupled with the relevance of our mission critical capabilities to the national security needs of our customers in the UK, US and Australia as well as NATO allies, positions us well for long term future growth," Qinetiq said.

"Within the evolving threat environment our customers' spending priorities, which are well matched to our capabilities, have been boosted by commitments to increased spending in the UK and Europe."

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the sector had hoped pledges from European nations to swell military budgets amid heightened geopolitical tensions "would translate into a flurry of new contracts".

"But as alliances shape shift, the uncertainty has been more of a curse than a blessing. Lay-offs at the US defense department may exacerbate its current problems, given that its short-term contracts in the US which appear to have already been hit hard. It seems spending decisions are being delayed amid the uncertainty," she said.

Reporting by Frank Prenesti for Sharecast.com