Ultra Electronics set to sparkle

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.

This turnaround should be bolstered by an improving market backdrop. True, cash-strapped governments are often ready to cut defence spending, but increased global insecurity is widely expected to strengthen demand for the group's specialist solutions for border security, critical infrastructure protection and cyber security. Crucially, those concerns should ensure the go-ahead for President Obama's proposal to increase US defence procurement and development spending by 13 per cent.

Demand in the UK could finally pick up, too. After pledging to retain the current Trident nuclear deterrent fleet and build four new nuclear missile-armed submarines, the new government has agreed to ringfence defence spending at 2 per cent of GDP. It may not last, but while it does it's good news for Ultra.

Better still, strong market positions in niche areas means Ultra potentially stands to benefit more than other electronics suppliers. For example, demand is red hot for Ultra's cyber security solutions. According to consultancy firm PwC, 90 per cent of large organisations suffered an internet attack last year at an average cost of £1.46m. In response, the corporate world is prepared to spend big to protect itself from hackers.

Ultra's acquisitive strategy has boosted its exposure to other sectors that are outgrowing traditional military markets. That includes June's acquisition of San Diego-based Kratos Defense & Security solutions, a business whose systems for warplanes and missiles is booming off threats from Russia and China. Picked up for a cool $265m (£170m), management expect Kratos to add to earnings in its first full year's contribution.

Things are looking up for a number of the group's other niche markets. Rising geopolitical tension is buoying demand for border surveillance, and huge global investment in quiet submarines is fuelling appetite for Ultra's anti-submarine warfare capabilities. Elsewhere, big-spending export markets remain keen on Ultra's light, mobile, high-bandwidth communication systems.

The order book may also be enhanced by the group's new organisational structure, whereby divisions have been regrouped to better reflect their addressed markets. Other changes should also help. In particular, annual cost savings of £20m have also been mooted as part of Ultra's self-help drive. At a projected cost of £30m over three years, the extra funds will be used to increase investment in research and development, grow competitiveness and improve profits.