Defence companies have had a bad press lately, a result of declining military spending in the west and uncertainty over where the axe might fall next. Shares in Ultra Electronics are down by over a fifth since last year's UK government spending review, but that is unfair. All the hard work ramping up Ultra's exposure to high-growth technologies make its shares one to own.
- Focus on high growth technologies
- Trading as expected despite defence cuts
- Well-diversified portfolio
- Potential takeover target
- Military budgets shrinking
- Half of sales from US
The company is spending big in hot sectors. It snapped up cyber security company AEP Networks in September for up to £48m followed by US cyber surveillance equipment company Zu Industries for £49m and Special Operations Technology, a US cyber systems business, for £25m. Earnings upgrades followed.
It is clear, then, where Ultra thinks the growth is. Consider the statistics – global cyber security spending may reach $60bn (£38bn) in 2011 and grow 10 per cent every year for the next three to five years, according to management consultant PwC, as governments divert cash from defence to security and companies wise up to the risks.
Ultra now expects to make 20 per cent of sales from cyber in 2012, worth about £160m, according to investment bank Goldman Sachs, whose analysts reckon the Middlesex-based company is the best way to gain exposure to the fastest-growing niche in the defence sector.
Not long ago, Goldman talked of Ultra as being prey. "The most strategically valuable asset in Europe's defence industry," it said. And Barry Jaber, security expert at PwC, adds: "Deal activity in cyber security is expected to continue to grow, given the fragmentation of the market and the attractive growth outlook."
ULTRA ELECTRONICS (ULE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,459p | MARKET VALUE: | £1.01bn | |
| TOUCH: | 1,456-1,459p | 12-MONTH HIGH/LOW: | 1,854p | 1,265p |
| DIVIDEND YIELD: | 2.6% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 375p | NET DEBT: | 4% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 413 | 57 | 61 | 21.2 |
| 2008 | 515 | -3 | 3 | 26.0 |
| 2009 | 651 | 108 | 115 | 31.2 |
| 2010 | 710 | 91 | 97 | 34.6 |
| 2011* | 722 | 115 | 99 | 38.0 |
| % change | +2 | – | +2 | +10 |
Normal market size: 2,000 Matched bargain trading Beta: 0.7 *Goldman Sachs estimates (profits are not comparable with historic figures) | ||||
Traditional markets are holding up, too. Sure, budget delays both here and in the US are unhelpful, but no single platform accounts for more than 5 per cent of sales and Ultra is deeply entrenched on numerous long-term military programmes. No wonder it has traded in line with expectations since July and won some nice contracts – a torpedo defence system for Turkish submarines, kit for Warrior armoured vehicles and sensors for Chinese nuclear power stations among them.
Joint ventures in Oman, where a £207m airport systems contract raised cheers this summer, and another in China focused on civil aircraft, are a further source of income away from defence.
Money from commercial aerospace will start to roll in as well now that the Boeing 787 is flying paying passengers. Ultra's wing ice protection system is worth $150,000 per plane, or $18m a year at a targeted production rate of 10 planes a month by the end of 2013.
So confident in Ultra's future is chairman Doug Caster that he bought another £1m of shares in August at 1,350p each. Mr Caster now has an £11m stake. Non-executive director Ian Griffiths spent £122,000 a few days after.
