A 1m portfolio would be enough for most of us to retire in comfort. But unless you already have a lot of spare cash, achieving this goal is likely to require market-beating investment returns.
Today Im going to look at two companies I believe have the potential to beat the market.
Order backlog up by 69%
FTSE 250 defence group QinetiQ Group (LSE: QQ) delivered a welcome return to sales growth in its 2017 financial year, which ended on 31 March.
Revenue rose by 3.6% to 783.1m, while pre-tax profit climbed 16.2% to 123.3m. Underlying earnings rose by 11% to 18.1p per share, while the dividend was increased by 5.3% to 6p. These figures give QinetiQ a trailing P/E of 17 and a dividend yield of 1.9%.
Theorder backlog rose from 1.3bn to 2.2bn last year. The bulk of this increase was down to a 1bn amendment to the groups Long Term Partnering Agreement with the UK Ministry of Defence. The company says this is its largest and most significant contract since privatisation.
Last years acquisitions of Meggitt Target Systems and Australias RubiKon Group are also expected to drive new business, with a particular focus on international growth.
Why Id buy
QinetiQ isnt cheap, but the outlook seems positive and the firms financials are very solid. The group ended last year with net cash of 221.9m, despite a cash outflow of 65.7m relating to the two acquisitions.
The company generated an underlying operating margin of 15.1% last year. This contributed to a return on capital employed (ROCE) of 19%. Thats higher than any of the firms rivals in the UK defence sector.
In my view, QinetiQs proven profitability and healthy balance sheet mean that it remains a strong hold and a possible long-term buy.
Discount property to buy?
London-focused property group Helical (LSE: HLCL) said on Thursday that the valuation of its like-for-like London property portfolio rose by 9.8% to 666m during the year to 31 March. Contracted rents were 16.9% higher, at 27.9m.
Bycontrast, the performance of the groups regional portfolio, which is focused on Manchester, fell by 2.1% to 351m on a like-for-like basis. Contracted rents of 24.3m were below the firms estimated rental value for the portfolio of 26.6m.
In my view, the key metrics when investing in property are yield and net asset value. Helicals EPRA net asset value per share an industry standard measure rose by 3.7% to 473p last year. When compared with the current share price of 337p, this means Helical is trading at a 28% discount to net asset value.
However, if falling rental values in the regional portfolio are any indicator, property values could also fall over the next year.
Its also worth noting that Helical has a relatively high level of gearing, with a loan-to-value ratio of 51% at the end of March. The groups debt maturity profile is also quite short, at just 3.6 years, so Helical will need to refinance some debt over the next two or threeyears.
Im attracted to Helicals discount to net asset value, but the 2.6% dividend yield isnt especially exciting and gearing is quite high. Id hold for now, with a view to buying more at a lower price.
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