LOOKING FOR GROWTH FROM DEFENCE AT QINETIQ - 15/12/25

Although much of my investment focus has been, and largely remains, in the small- and micro-cap space, I do venture elsewhere from time to time.

These days I hold a number of investment trusts for income, and I also occasionally dip into the FTSE 100 and FTSE 250.

One such foray into the blue-chip arena proved particularly successful in early 2022 when I bought BAE at around £6.00.

The rationale was straightforward: Russia had amassed troops on Ukraine’s border and an invasion looked, to me at least, increasingly inevitable.

In that environment the defence sector seemed an obvious beneficiary, especially given the very real concerns about escalation at the time.

As it transpired, BAE turned out to be an excellent buy. I top-sliced at £14.00, the shares went on to trade above £20.00, and today sit around £17.00. While it might be tempting to conclude that defence stocks are now fully priced and up with events, I personally think there could be another leg higher, with certain names particularly well positioned to benefit.

Regular readers will know that I have also owned defence players at the smaller-cap end of the market, most notably Concurrent Technologies, where my average price was circa 46p. That investment has performed exceptionally well, with the shares now trading at £2.31.

I also already held Pennant International, a much smaller and more niche operator in the space, although this holding has been more disappointing.

Delayed orders have left the shares out of favour and unloved, but such lumpiness is nothing new in defence and related industries and is simply one of the factors that has to be weighed up when investing across the sector.

Even so, given the prevailing geopolitical environment and the accelerating nature of global threats, it seems increasingly clear to me that not only the UK government but governments across Europe will now have to step up their activity in a meaningful way.

The noises coming from various quarters suggest a renewed and more concentrated effort to accelerate multiple initiatives, which should further benefit defence-focused businesses.

With that in mind, one quoted company I have now bought into is QinetiQ (QQ).

At around £4.30 per share the business is valued at roughly £2.29bn and sits comfortably within the FTSE 250.

Headquartered in London, the company has major UK operations in Farnborough, Porton Down, Malvern and Dunsfold, alongside offices in the US, Australia and Europe, making it a genuinely global player.

In terms of its technology and services, QQ provides critical testing and evaluation for military equipment and systems, all of which must undergo rigorous scrutiny long before deployment.

As such, the company is well placed to be an early beneficiary of increased defence spending and the acceleration of new or upgraded systems across the sector, and it has already secured a number of high-value contracts.

Importantly, QinetiQ also excels in cyber and electronic warfare, alongside robotics and AI-enabled data analysis, all of which are central to modern-day defence. 

There is also growing exposure to space too, where its technology is used to test complex systems prior to any deployment.

Not surprisingly, the nature of what QinetiQ does carries extremely high barriers to entry, which leaves the company ideally positioned to build, expand and drive revenue and profits over the coming years.

No investment is ever a sure thing though, and it is fair to say that QQ has delivered steady rather than any eye-catching growth.

Revenue has risen from just over £1bn in 2020 to £1.93bn for the 2025 financial year. Pre-tax profits were £192m in 2023 and £182m in 2024, with last year showing a statutory operating loss of £90.5m, whilst the statutory net loss after tax of £185.7m.

That loss though was driven by goodwill impairments and other one-off items which do not reflect the underlying trading performance; on an adjusted basis, pre-tax profit came in at £147m.

Importantly, the company has increasing exposure to the vast US market, alongside significant opportunities across autonomy and AI.

This includes AI-driven testing of drones and cyber-threat detection, which aligns very closely with where modern warfare is already focused and continuing to evolve.

That said, it is worth acknowledging that over the past few years both the share price and overall financial performance have fallen somewhat short of expectations, hence the share price performance has been more muted.

Contract delays and group-wide restructuring have held the business back from delivering a more notable performance and those factors cannot be ignored.

However, the restructuring programme is now largely complete and the pipeline looks highly impressive and increasingly ready to deliver, with the potential for momentum to build.

This backdrop is only reinforced by the ongoing conflict in Ukraine and the US’s increasingly unpredictable stance on European security, which is forcing countries, including the UK, to significantly step up development and deployment.

Whilst the fear of war rightly brings into focus the appalling human cost, future conflicts are likely to involve ever greater use of drones, electronic warfare and robotics. That should mean fewer troops physically deployed and a growing reliance on unmanned and AI-driven technologies, an area where QinetiQ sits right at the outset.

On the financial front, the company remains a strong cash generator and pays a reasonable dividend, currently yielding around 2%, with scope for growth, whilst there is a significant programme of share -buy- backs in place.

Looking at broker consensus numbers for the year now in progress (2026) and next year 2027 from what i have been able to glean the expectations are for revenues of £1.92b rising to £2.04b with underlying operating profits of £211m and £229m with underlying EPS expected at 30.8p and 34.7p.

That sees the stock trading on a forward PE of 14 that reduces to 12 if those numbers are achieved and that appears attractive to me given the sector average is running close to 20 and where BAE currently trades on a PE of 26.

Although QinetiQ may not be the most exciting name in the sector on a day-to-day basis, but it strikes me as one of the more quietly compelling opportunities currently available.

As already mentioned, the business operates at the very front end of defence capability, has deep technical expertise that is hard to replicate, and is now emerging from a period of disruption and restructuring with a clearer focus and strengthening pipeline.

With defence spending structurally higher, geopolitical risk elevated and the nature of warfare rapidly evolving towards autonomy, cyber and AI-driven systems, QinetiQ looks well aligned with where the money is increasingly being directed.

At around £4.30 a share the valuation does not appear stretched for a company with strong cash generation, high barriers to entry and meaningful exposure to long-term growth themes across both the UK and US defence markets.

If execution can improve and contracts flow through as expected, there is scope for both earnings progression and a re-rating over time.

As ever, patience is required, but given I am prepared to look beyond short-term noise, QinetiQ looks like a sensible and well-placed way for me to gain further exposure to a sector that still has plenty of running left.