18 Apr 19. Pay the price for QinetiQ. There are cheaper stocks than QinetiQ (QQ.). The aerospace and defence engineer, which generates the bulk of its business from its partnerships with the UK and US governments, currently trades at a mild premium to its recent history – its shares have marched upwards on a near-consistent basis since their nadir in early 2018. But full-year results are a month away, and with orders expected to be well ahead of last year and the underlying business appearing in robust shape, we believe QinetiQ’s story merits investment.
QinetiQ’s balance sheet is central to our investment case. QinetiQ claims to have “one of the strongest balance sheets in UK defence”. It has no debt and £249m in net cash, providing the group with firepower to deploy on acquisitions, returns to shareholders and capital investment, both in its own business and in customers’ projects. The group made two acquisitions in 2018, both in the field of military training, which underline a recent trend away from its traditional engineering activities. And it recently agreed a £1.3bn deal under its long-term partnership with the Ministry of Defence (MoD) to modernise 16 defence facilities. QinetiQ will fund the capital investment itself and recoup the costs over the life of the contract.
Charlotte Keyworth, aerospace and defence analyst at Barclays, says that “customer-funded capex is a good use of organic investment” for QinetiQ, given the strength of its balance sheet. Meanwhile, Qinetiq shed financial risks by transferring a third of its in-house pension scheme, which removed £120m of bookkeeping surplus from its accounts.
The profit and loss account is also clean. QinetiQ has managed to keep adjustments to a minimum, with only £23m in adjusting items relative to is statutory pre-tax profit of £145m in 2017-18, most of which are spread across small gains on the sale of property, investments and intellectual property. QinetiQ also expenses the vast majority of its research and development spend, capitalising only £1.5m of its total £310m R&D outlay last year. This compares favourably with, say, Rolls-Royce (RR.), whose capitalised R&D costs soared from £99m to £342m between 2016 and 2017 after a change in accounting policy. So QinetiQ adopts a transparent accounting policy, which should encourage investors.
It also makes good use of its resources, and it is adapting. The group has been criticised by City analysts for being overly exposed to its work with the MoD, which will account for around 70 per cent of its sales in 2018-19. And if you want to know what a black hole looks like, you needn’t look to outer space – the House of Commons public accounts committee highlighted a £7bn gap in the MoD’s 10-year funding plan in February.
In response to this legitimate bear point, the engineer is diversifying its revenue streams, and recently secured a seven-year, $164m (£125m) robotics contract with the US Army. The proportion of group revenues from the UK fell to 73 per cent from 78 per cent between 2017 and 2018, although much of the reduction stemmed from lower UK government spending. Meanwhile, QinetiQ is negotiating the second tranche of its long-term partnership with the government, under which it is expected to commit around £160m-worth of capital spending over the next three years in return for a pipeline of MoD work.
Consistently high returns on capital and a rise in operating profit margins demonstrate QinetiQ’s ability to translate its partnerships and investment into financial success. The dividend is well covered by earnings per share (see table). While management has offered no guidance about an extraordinary shareholder payout, QinetiQ has the headroom.
Analysts at JP Morgan Cazenove forecast full-year 2019 pre-tax profits and earnings per share of £114m and 18p respectively, rising to £118m and 18.3p in 2020.
IC View
For us, QinetiQ is a quiet success story that has been building for a few years now. Uncertainties over government defence spending and a fairly narrow client base have offered causes for concern and may have depressed the share price, but QinetiQ is diversifying, while defence budgets appear robust for the meantime. The quality of the underlying business is essential to our thesis – QinetiQ’s balance sheet gives it an array of options that allows it to grow, adapt and reward its backers. Buy. Last IC View: Hold, 274p, 16 Nov 2018. (Source: Investors Chronicle)
18 Apr 19. Sydney based composites manufacturer, Quickstep Holdings (ASX: QHL) has reported another strong quarter of growth, with year to date sales now up 19 per cent on the same period last year. The manufacturer of aerospace and aviation composites reported third quarter sales up 13 per cent to $16.5m, bringing sales so far this year to a record $50.4m.
The company continued to report positive cash flows as it stepped up production of composites used to manufacturer the twin tails of the F-35 Joint Strike Fighter (JSF).
The company reported: “Quickstep remains on track to deliver significantly higher JSF volumes over the next 18 months, with JSF revenue expected to increase approximately 40 per cent in FY19.”
A machine tool failure reported three months ago has been resolved but was a drag on performance in the third quarter.
“An improved operational performance and lift in gross margin per cent is expected in Q4, including benefits from process improvements identified during the outage.”
The company has been building up inventory to support the production ramp up and ended the quarter with a cash position of $7.6m.
During the quarter Quickstep furthered its plans with Chemring Australia to begin production of flare housings for the F-35.
It also produced test production samples of aerospace grade composites using its patented Qure production process that avoids the expensive autoclave stage.
Quickstep continues its lean and continuous improvement initiatives across all functions at the Bankstown and Geelong sites.
“Initiatives undertaken by our process improvement teams in Q3 include improvements to production cycle times, visual management, process mapping and the introduction of new workplace organisation methods.”
(Source: Google/https://www.aumanufacturing.com.au)
17 Apr 19. SkyScape Industries Acquired by American Aerospace. American Aerospace Technologies, Inc. (AATI), a provider of real-time remote sensing and airborne intelligence services for enterprise, announced that it has signed a definitive agreement to acquire Sky Scape Industries, LLC (SSI) an industry leading unmanned technology service-provider. SSI’s services are widely used by critical infrastructure operators in the electric, water, and oil & gas industries. SSI will continue to provide integration services, professional drone advisory services, and inspection services nationwide.
“The SSI team is world class, and is perfectly aligned with AATI’s core values – providing safe and effective integration of airborne remote sensing technology with a primary focus on Part 107 drone operations,” stated David Yoel, CEO of AATI. “By combining the two complimentary companies, we expand our ability to offer products and services with manned aircraft, long endurance unmanned aircraft and small UAS.”
“AATI is a true leader in the unmanned industry. They have the resources and capabilities to truly push the unmanned industry to new heights. Our unification is solidified by our common core values – passion for innovation and driving this industry further,” said Nathan Ernst, Founder and President of SSI.
“The unmanned aviation industry continues to accelerate, including the integration of long endurance UAS beyond visual line of sight (BVLOS) into the National Airspace System and Unmanned Traffic Management (UTM) integration for small UAS,” continued Mr. Yoel. “As we continue our endeavors at the forefront, SSI will create exponential value-add for existing and new customers.”
SSI was founded in 2014 and is headquartered in New Jersey.
The acquisition remains subject to customary closing conditions. SSI will operate as a separate subsidiary entity focusing on small Unmanned Aerial Systems (sUAS) and related services. More details about the acquisition will be provided in subsequent posts via each company’s website and news releases in the near future.
SkyScape Industries Acquired by American Aerospace
American Aerospace Technologies, Inc. (AATI), a provider of real-time remote sensing and airborne intelligence services for enterprise, announced that it has signed a definitive agreement to acquire Sky Scape Industries, LLC (SSI) an industry leading unmanned technology service-provider. SSI’s services are widely used by critical infrastructure operators in the electric, water, and oil & gas industries.
SSI will continue to provide integration services, professional drone advisory services, and inspection services nationwide.
“The SSI team is world class, and is perfectly aligned with AATI’s core values – providing safe and effective integration of airborne remote sensing technology with a primary focus on Part 107 drone operations,” stated David Yoel, CEO of AATI. “By combining the two complimentary companies, we expand our ability to offer products and services with manned aircraft, long endurance unmanned aircraft and small UAS.”
“AATI is a true leader in the unmanned industry. They have the resources and capabilities to truly push the unmanned industry to new heights. Our unification is solidified by our common core values – passion for innovation and driving this industry further,” said Nathan Ernst, Founder and President of SSI.
“The unmanned aviation industry continues to accelerate, including the integration of long endurance UAS beyond visual line of sight (BVLOS) into the National Airspace System and Unmanned Traffic Management (UTM) integration for small UAS,” continued Mr. Yoel. “As we continue our endeavors at the forefront, SSI will create exponential value-add for existing and new customers.”
SSI was founded in 2014 and is headquartered in New Jersey.
The acquisition remains subject to customary closing conditions. SSI will operate as a separate subsidiary entity focusing on small Unmanned Aerial Systems (sUAS) and related services. More details about the acquisition will be provided in subsequent posts via each company’s website and news releases in the near future.
17 Apr 19. Celera Motion Broadens Precision Motion Capabilities. Adds Servo Drives to Complement Its Encoders, Motors and Mechatronics. Celera Motion, a business unit of Novanta Corporation, announces the acquisition of Ingenia, which develops and manufactures servo drives and control software. This acquisition significantly enhances Celera Motion’s precision motion capabilities.
Based in Barcelona, Spain, Ingenia provides original equipment manufacturers (OEMs) with customized motion control solutions based on high performance and high power servo drive technology. Celera Motion provides medical and advanced industrial OEM customers with precision optical and inductive encoders, motors and actuators, and mechatronics solutions.
“Ingenia’s products complement the Celera Motion products, and we’re excited to bring these talented and innovative teams together,” said Leane Sinicki, Precision Motion Group President, Novanta. “This acquisition expands and enhances our offering as we help our customers solve their most complex motion challenges.”
About Celera Motion
Celera Motion, headquartered in Bedford, Massachusetts, is a market leading provider of motion control components and subsystems for OEMs serving a variety of medical and advanced industrial markets. Celera Motion offers precision encoders, motors, and customized mechatronic solutions that help customers solve challenging motion control problems. For more information, visit www.celeramotion.com.
About Novanta
Novanta is a trusted technology partner to OEMs in the medical and advanced industrial technology markets, with deep proprietary expertise in photonics, vision and precision motion technologies.
(Source: BUSINESS WIRE)
17 Apr 19. Textron Inc. (NYSE: TXT) today reported first quarter 2019 net income of $0.76 per share, compared to $0.72 per share in the first quarter of 2018.
“Our results in the quarter were driven by growth and performance at Aviation and continued strong execution at Bell, which resulted in significant margin improvements at those segments,” said Textron Chairman and CEO Scott C. Donnelly.
Cash Flow
Net cash used by operating activities of the manufacturing group for the first quarter totaled $196m, compared to $53m of net cash used last year. Manufacturing cash flow before pension contributions, a non-GAAP measure that is defined and reconciled to GAAP in an attachment to this release, reflected a use of cash of $291m compared to a use of cash of $158 m last year.
In the quarter, Textron returned $202m to shareholders through share repurchases.
Outlook
Textron confirmed its 2019 earnings per share from continuing operations guidance of $3.55 to $3.75 and its expectation for cash flow from continuing operations of the manufacturing group before pension contributions of $700 to $800m with planned pension contributions of about $50m.
Donnelly continued, “The company remains on track for a strong 2019 as we continue our focus on operational improvement and earnings growth.”
First Quarter Segment Results
Textron Aviation
Revenues at Textron Aviation of $1.1bn were up 12%, primarily due to higher volume and mix across the jet and commercial turboprop product lines.
Textron Aviation delivered 44 jets, up from 36 last year, and 44 commercial turboprops, up from 29 last year.
Segment profit was $106m in the first quarter, up from $72m a year ago, due to the higher volume and favorable performance.
Textron Aviation backlog at the end of the first quarter was $2.0bn, up $204m from year-end.
Bell
Bell revenues were $739m, down 2% from last year, primarily on lower commercial volume.
Bell delivered 30 commercial helicopters in the quarter, down from 46 last year.
Segment profit of $104m was up $17m, primarily due to favorable performance.
Bell backlog at the end of the first quarter was $6.3bn, up $459 m from year-end.
Textron Systems
Revenues at Textron Systems were $307m, down from $387m last year, reflecting lower TAPV deliveries at Textron Marine & Land Systems and lower Unmanned Systems volume.
Segment profit was down $22m from last year’s first quarter, reflecting lower volume and lower net favorable program adjustments.
Textron Systems’ backlog at the end of the first quarter was $1.4 bn, down $62 m from year-end.
Industrial
Industrial revenues of $912m decreased $219m, largely related to the impact from the disposition of our Tools & Test product line and lower volume.
Segment profit was down $14m from the first quarter of 2018, largely due to the impact from the product line disposition and lower volume, partially offset by favorable performance primarily related to the Specialized Vehicles product line.
Finance
Finance segment revenues were up $1m, and profit was flat with last year’s first quarter.
17 Apr 19. RENK AG Purchases Suspension Specialists Horstman Holdings Ltd. On April 16th, 2019, globally active RENK AG has successfully completed the acquisition of Horstman Holdings Limited (“Horstman”) and its group of companies. Horstman is a leading solution provider in the global armor and tracked vehicle mobility markets, well known for its hydraulic and hydropneumatic suspension systems and complementary high integrity engineering.
The aim of the acquisition is to expand the product portfolio of RENK’s vehicle transmissions unit, to further develop RENK’s expertise in powertrains for tracked vehicles and to strengthen their global presence.
RENK CEO Florian Hofbauer: “By acquiring Horstman, RENK is continuing to implement its internationalization strategy and to expand its systems expertise. Horstman, like RENK, is also a well-established and innovative technology leader in its field.”
Horstman operates through the three business areas Mobility, Project Build Services and Environmental & Power. It currently has 157 employees across its locations in the UK, the USA and Canada.
Horstman CEO Ian Pain: “Our customers and employees will benefit as RENK allows us to continue operating as an independent company and to build on our existing success, while also opening the opportunity to create new mobility solutions together.”
BATTLESPACE Comment: It was always a question of when not if Horstman would be acquired and the RENK acquisition makes perfect sense and further increases the German hold over the UK armoured vehicle industry which is now a shadow of its former self and in long-term decline and will almost certainly disappear as an entity within years. Horstman has valuable real estate in the Bath area which may or may not be include in the acquisition.
16 Apr 19. 97% of Gemalto shares have been tendered to the Thales offer. Reference is made to the joint press release by Thales (Euronext Paris: HO) and Gemalto (Euronext Amsterdam and Paris: GTO) dated 29 March 2019 on the results of the recommended all-cash offer by Thales for all the issued and outstanding shares of Gemalto (the Offer) in which the Offer was declared unconditional and the Post-Closing Acceptance Period was announced. Terms not defined in this press release will have the meaning as set forth in the Offer Document.
- Following the Post-Closing Acceptance Period, which ended yesterday, approximately 97.02% of Gemalto shares have now been tendered to the Thales offer.
- Settlement of Shares tendered during the Post-Closing Acceptance Period will take place on 18 April 2019.
- Thales will initiate the statutory buy-out proceedings as soon as possible in order to obtain 100% of the Shares.
Thales and Gemalto will ask Euronext to delist the Gemalto Shares shortly after Gemalto’s 2019 annual general meeting, to be held on 28 May 2019.
15 Apr 19. The UK Competition & Markets Authority will be inviting comments into a proposed business sale by BAE Systems PLC, it said on Monday. In January, BAE sold a 55% stake in its combat vehicles unit BAE Systems Global Combat Systems Ltd to Germany’s Rheinmetall AG for GBP28.6m. The joint venture will be renamed Rheinmetall BAE Systems Land and will play “a major role” in new mechanised vehicles for the British army. The CMA is investigating whether the joint venture will lead to a “substantial” lessening of competition” in the UK, and has set April 30 as the deadline for any comments. BAE shares were flat on Monday morning at 508.80 pence each. (Source: News Now/http://www.lse.co.uk)
14 Apr 19. Chinese defence firm set for IPO. The China Securities Regulatory Commission (CSRC) has approved the market listing of the Xi’an Triangle Defense Company (Triangle Defense), a specialist in component manufacturing across military aerospace, shipbuilding, and land systems domains. The CSRC said on 12 April that it had reviewed Triangle Defense’s application to launch an initial public offering (IPO) and approved the share sale. The company has been asked to co-operate on the IPO with the Shenzhen stock exchange.
In 2017 Triangle Defense recorded revenues of CNY375m (USD56m) and profits of CNY117m. One of the company’s shareholders is a subsidiary owned by the Aviation Industry Corporation of China (AVIC), the country’s dominant military aerospace group. (Source: Google/IHS Jane’s)
12 Apr 19. HENSOLDT, the leading independent sensor solutions house has agreed to acquire the major part of the activities of Nexeya, Chatenay/France, a provider of services and electronics solutions for defence and commercial customers. The closing is expected after obtaining all necessary approvals in the third quarter of 2019.
HENSOLDT will acquire Nexeya’s test and integration and services business as well as major parts of its mission management and power conversion businesses. The acquired activities represent a turnover of around €95m and a workforce of approximately 620 employees.
“Nexeya strengthens our industrial base particularly in France, improving customer access and enhancing our product portfolio”, said Thomas Müller, CEO of HENSOLDT. “Furthermore, the acquisition boosts our strategy of developing commercial markets, creating new opportunities in the area of services. Thus, the move is in line with the acquisitions made in the last two years in the areas of avionics, security and industrial engineering.”
“HENSOLDT has been present in France since 2018 with its subsidiary HENSOLDT France SAS, with product lines in the field of communication and IFF. This is an exciting new chapter for our growth story in the important French market. Our complementary product portfolios provide opportunities for innovative product combinations and new developments”, Thomas Müller said. “Nexeya will benefit from increased global and segmental market access, investment capacities and human skills using the continuously growing HENSOLDT sales and marketing network“.
The space activities of Nexeya as well as certain defence activities are not part of the transaction, they will be retained by the current shareholder.
11 Apr 19. Eject from Rolls-Royce. Rolls-Royce (RR.) has engineered itself a costly headache. The blades in its Trent 1000 engines have been deteriorating faster than expected. In February, Air New Zealand partly blamed a soft first half of its financial year on the disruption to its network caused by its Trent 1000s. And at the start of April, Singapore Airlines was forced to ground two of its Boeing 787-10s after inspections to the Trent 1000-TEN upgrade revealed that blade issues would force the premature replacement of the engines. Rolls this week announced an accelerated inspection regime.
A market shift from large jumbo jets to more nimble aircraft has also affected Rolls-Royce’s business, and specifically its order pipeline. It incurred a £186m exceptional charge connected with the Trent 900, after Airbus decided to shorten its A380 programme. Airbus’s decision meant a reduction to an order agreed under a $9.2bn (£7.2bn) deal in 2015 to provide engines and aftercare for 50 Emirates A380s (revised up to 52 in 2016). Rolls-Royce had already delivered engines for 19 aircraft, and would supply 56 engines for 14 remaining aircraft instead. The Trent 900s have also not been without fault – low durability of various parts cost Rolls-Royce £51m and £14m in cash costs over 2017 and 2018 respectively.
The raft of exceptional charges in 2018 meant Rolls’ underlying £616m pre-tax profit sank to a statutory loss of £803m. We feel there are in fact grounds to consider design problems an “underlying” issue in themselves. The statutory numbers could have been worse had Rolls not changed its accounting policies in 2016 to start capitalising more research and development (R&D) cost. R&D capitalisation rose from £99m to £342m from 2016 to 2017. Meanwhile, in 2018, the £768m of R&D that was expensed and amortised in the profit-and-loss account compared with £1.1bn of spending. Fans of Rolls can, however, point to improved free cash flow (FCF) last year. FCF rose from £259m in 2017 to £568m in 2018. However, there are reasons to feel lukewarm about this number, too. For one thing, standardisation of payment terms led to a cash boost of £400m during the year, which is not expected to be repeated. What’s more, changes to revenue recognition rules have reveal how dependent Rolls’ cash flows are on advanced payments by customers for future aftersales service work. Indeed, during 2018 FCF was boosted by £944m of long-term service agreement (LSTA) payments. Broker JP Morgan estimates that when this work is undertaken, only 35 per cent of the receipts will represent profit and therefore be available to shareholders.
The company’s finances are also arguably less strong than they appear in our table. While Rolls did report a hearty net cash position at the end of 2018, boosted by £573m proceeds from the disposal of its L’Orange fuel injection business, this does not reflect its heavy reliance on operating leases, which will need to be brought onto the balance sheet this year. Using a standard method of valuing lease liabilities at seven times annual rents (£300m in 2018) gives a value for the group’s lease obligations of £2.1bn. The chart below shows the advance in lease obligations as reported in the annual accounts.
IC View
Despite recent disappointments, Rolls has seen a pick-up in orders, with its backlog rising from £55bn to £63bn last year, while FCF has also marched upwards. However, under the bonnet the picture is not so reassuring. Add in the recent issues the company has had with key programmes and we rate the shares a sell. (Source: Investors Chronicle)