First-half results from Ultra Electronics (ULE) were disappointing, but that shouldn't undermine the longer-term prospects for the supplier of software and electronics to defence, security and energy markets. A recovering US defence budget and growing demand for anti-submarine military equipment and encryption capabilities could yield a sharp increase in sales growth and profits over the next few years, making now a good time to buy the shares.
- Defence spending cuts bottoming out
- Exposure to healthier markets
- New organisational structure and cost-cutting bode well
- Shares rated at uncharacteristic discount to peers
- Poor first-half results
- Defence budgets always likely to be under pressure
Political headwinds in the US, together with the shock termination of a contract to install IT at Oman Airport, contributed towards half-year revenue sliding 3 per cent to £332m and basic pre-tax profit plunging more than two-thirds to £14.8m. There were, however, positives. First, investors had already been warned of a second-half bias in 2015. Second, the company's firm orders - buoyed by sonar, security and a contract with the Indonesian navy - cover 83 per cent of 2015's budgeted revenues. The end of the Oman Airport fiasco, which triggered a significant cash outflow, should also mean better cash generation.