Two FTSE-Listed Stocks Under the Influence of Covid-19 Outbreak: Primary Health Properties & Qinetiq Group

The Health Care REITs, Primary Health Properties PLC and the Aerospace and Defense company, Qinetiq Group PLC has released their trading update on 1^st April 2020. Let’s walk through the business model & performance, strategies & outlook and recent developments of both the companies.

Primary Health Properties PLC (LON:PHP)

(Source: Company Presentation)

The Primary health properties operate as the United Kingdom-based healthcare REITS with the portfolio consisting about 490 primary healthcare facilities and portfolio value of GBP 2.4 billion.

The Business model that yields sustainable long-term growth

The group invests in modern and local primary healthcare facilities, having potential to generate progressive returns through both earnings’ growth and capital appreciation. It targets properties with long term leases, supported by secure covenants where rental income is prominently contributed by government bodies.

(Source: Company Website)

Recent Developments Impacting the Trading Environment, Management and Portfolio Valuation

• 1^st April 2020: The group has published its trading update for Q1 FY2020, and the key highlights were
  • Around 90% of the rental income is contributed by either the United Kingdom or Irish government; hence, their income remained robust and secure, 79% of income had been collected in Q1 FY2020, while only 73% was received in Q4 FY2019.
  • As at 31 March 2020, group’s net debt reported at GBP 1,086.0 million (31^st December 2019: GBP 1,067.3), while loan to value stood at 44.8% (31 December: 44.2%).
  • The Company also announced a dividend of 1.475p per Ordinary Share, expected to be paid on 22^nd May 2020.
  • Upcoming development pipelines can be seen in the below table:

(Source: Trading Update, Company Website)

• 14^th January 2020: With completion of AGM, Ian Krieger and Peter Cole were appointed as Senior Independent Director and Chairman of the Remuneration Committee, respectively.

• 17^th December 2019: The group announced the acquisition of investment property in Bolton with net consideration of £8.0 million and funding development of a primary care in Banagher, Co. Offaly, Ireland.

• 14^th March 2019: PHP had completed the all-share merger with MedicX Fund Limited, their portfolio value combinedly stand at £2.4 billion comprising around 488 assets.

(Source: Company Presentation)

Actions to Reap Strategic Advantage in Future

• Deliver progressive returns:

Continuously generate progressive shareholder returns through a combination of earnings and valuation growth through the strong pipeline in the UK and Ireland.

• Grow property portfolio:

Fund the development of modern facilities and merging with assets like MedicX to generate rental growth and capital appreciation.

• Manage effectively and efficiently:

36 asset management projects have been completed, on-site or about to commence in the year, investing GBP 13.4 million and generating GBP 0.6 million of additional income.

• Fund diversified long term funding:

Recently in September 2019, completed an equity placing of GBP 97.7 million net of expenses along with GBP 100 million renewal of loan facility with HSBC.

Key Financial Highlights to Ponder on

• The net rental income for FY19 surged by £39.3 million or 51.4% to £115.7 million (FY 2018: £76.4 million), following the merger with MedicX, which contributed £34.6 million to net rental income, and other several acquisitions in 2018 and 2019, which contributed £2.9 million to net rental income as well as asset management projects contributing a further £1.8 million. In FY19, the total property portfolio increased by 2.1% to £2.4 million.
• Adjusted EPRA (European Public Real Estate) earnings per share surged in 2019 reflecting the contribution from the merger with MedicX, lower cost of finance, and rental growth while IFRS earnings per share decreased by 33.3% to 7 pence from 10.5 pence.
• The Adjusted EPRA NAV (Net Asset Value) surged by 2.7% to 107.9 pence per share (31 December 2018: 105.1 pence per share) during the year with the revaluation surplus and profit on sales of 4.1 pence per share being the crucial reason for the increase. However, this was partly offset by the impact of the MedicX merger equivalent to 1.4 pence per share. On IFRS basis, the NAV was down by 1.5% to 101 pence in FY19.
• The company represent the Group's 23rd successive year of dividend growth, with an increase in the dividend paid to shareholders in 2019 by 3.7% to 5.6 pence per share (FY 2018: 5.4 pence per share). Recently, the company has also announced the second quarterly interim dividend per ordinary share in 2020 of 1.475 pence, which will be paid to shareholders on 22 May 2020.
• The rental collection continues to stay strong and as of March 31, 2020, 79 per cent of the first quarter of 2020 rent has been received, in-line with the Q1 FY19 collection rate. On 31st March 2020, the net debt was £1,086 million, an increase from the previous period (31st December 2019: £1,067.3 million).

Key Ratios to Consider

• The average cost of debt was reduced by 40bp in 2019 to 3.5% as a result of several refinancing completed. This also reflects the EPRA cost ratio of 12% in FY19, with a reduction in the cost of funds and efficient management.
• The equity raises, robust capital growth in 2019 and convertible bond conversions have resulted in the Group's LTV (Loan to Value) falling to 44.2%, still as on 31st March 2019, the LTV ratio increased to 44.8% on a Pro-forma basis.
• The business has strong earnings and capital growth in 2019, which delivered a total property return of 7.7%, split 5.2% income growth and 2.5% capital growth.

Business Outlook – Reflecting Strong Demand

PHP's portfolio serves approximately 5.3 million patients or 8.0 per cent of the UK population, and the portfolio is their first point of contact with the NHS when they start their patient journey. As highlighted, the coronavirus pandemic would increase the demands on health systems across the world, not least the HSE in Ireland and NHS in the UK. However, in healthcare, the underlying demand is increased due to growing and ageing populations. The need for integrated, local, and modern primary healthcare facilities is becoming more acute, in order to relieve the pressures being placed on A&E departments and hospitals. From this crisis, the management expects that the primary healthcare will play an essential role in the future provision of health services and the continuing movement of services away from over-burdened hospital settings.

Qinetiq Group PLC (LON: QQ.)

Qinetiq is a science and engineering providing solutions group in Aerospace, Security and Defense sector to predominantly government organizations along with some international customers in other areas. The company is operating with over 6,000 people.

Highlights of Business Model

The group operates with

• 3,000 Scientists, engineers and technicians
• 1,200 granted patents
• Distinctive facilities of over 1.1 mil km square

(Source: Company Website)

Qinetiq generates value by providing advanced capabilities in the domain of air, land, maritime, cyber, and space at the rational cost by matching the customers’ needs and providing solution of the next generation. During the financial year 2019, the group invested approximately GBP 100 million for the company’s growth along with modernizing of core contracts such as Long-Term Partnering Agreement. It has also completed two acquisitions, bolstering their capabilities in training, both in the UK and internationally.

Recent Developments Underpin Sustainable Profitable Growth

• 1^st April 2020: The group had released the Trading and Covid-19 Update with the following highlights.
  • The group affirmed that financial performance is in line with expectation despite the disruption caused by the coronavirus outbreak.
  • Reported a robust order book of GBP 3billion with secured long-term government contracts.
  • Revealed a strong liquidity position at GBP 60 million and an undrawn revolving credit facility of GBP 275 million.
  • However, the ongoing virus is current impacting the trading in all their markets and hence, it has postponed a proposal of all dividends until end of 2020.
  • Salary cut of 33% for CEO and CFO and all Board members agreed to the cut of 25% in fees, as a temporary measure to preserve liquidity.

• 20^th December 2019: The group has completed the acquisition of Manufacturing Techniques Inc. (MTEQ), to bolster their international growth and strategy of innovation along with footsteps in the largest defense market, the United States.

• 21^st November 2019: Qinetiq’s space business had secured a three-year contract from European Space Agency for GBP 9 million, strengthening their position as space system integrators.

Key financial highlights ruling the trading environment

• As per the first half of 2020, the company reported a strong performance in the period with orders of £410.8 million, compared to £298.1 million in the same period a year ago, driven by the £60 million orders through the EDP contract and £67 million order for the UK Robust Global Navigation System (R-GNS) programme. As Global Products revenue was up 14% organically and EMEA Services was up 9% on an organic basis, underlying revenue was £486.5 million (H1 2019: £420.3 million), up 10% on an organic basis. Underlying operating profit was £59.7 million (H1 2019 restated: £51.6 million), and it was up £4.2 million (8%) on an organic basis if non-recurring trading items, acquisitions and the effect of foreign exchange are excluded, while statutory operating profit was £68.5 million (H1 2019 restated: £47.8 million).
• From the perspective of the third quarter of 2020, the company has continued to perform in line with the anticipations. The EMEA Services division is on-track in Q3 FY20, with delivering organic order and revenue growth as compared with the previous year. In Global Products division, the business has also delivered revenue growth and organic order in line with the anticipations. In the third quarter, the group has attained several milestones through the commitments to clients and investing in complementary acquisitions.
• During the last quarter, the company is well-positioned, despite the impact of COVID-19.

Business Outlook Denoting Strong Position

With an order backlog of nearly £3 billion and balance sheet, the company has entered in the new financial year 2021 from a position of strength; however the group is realistic that restrictions imposed by Governments globally to counter the spread of coronavirus (COVID-19) will have an impact on the upcoming revenues. Qinetiq has delivered a robust first half of 2020 results, with organic growth in revenue, orders, and profit-driven by decent performance in all the division, both in the United Kingdom and internationally. The company is maintaining anticipations for full-year operating profit with high single-digit growth in revenue. As per the long-term view, the group will continue to grow by executing the strategy and investing in the technology, people, systems and infrastructure. It also faces risk arising from the introduction of disruptive technologies/alternative business models, and its international business may be impacted by external influences outside of its control, especially as spending in the major markets remains under pressure. The business will provide a fuller assessment of the situation in the presentation of the full-year results and is working closely with the clients to understand their immediate priorities.

Comparative Stock Performance of Primary Health Properties & Qinetiq Group with FTSE-250 Index

In the last one-year, Primary Health Properties PLC and Qinetiq Group PLC share price has increased 25.88 per cent and 3.48 per cent, respectively as compared to the FTSE MID 250 index performance.

(Source: Thomson Reuters)

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