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Earnings upgrades for Ultra Electronics

Organic operating profit may have been flat in 2016, but Ultra Electronics' order book, cash generation and balance sheet have all improved.
March 7, 2017

Against a backdrop of "continuing regional tensions and conflicts" and a US presidential election that has provided "further impetus to the defence sector", Ultra Electronics (ULE) steps into 2017 in an ebullient mood. Beyond the spectre of conflict, the contractor can point to two significant financial metrics in support of this optimism: a sharp drop in its net debt to cash profit ratio by the close of 2016, aided by a full-year cash conversion rate of 92 per cent, the highest rate since 2011.

IC TIP: Buy at 2107p

This was a strong result, particularly as underlying operating profit would have been flat without the benefits of acquisitions and a strengthened dollar. Further down the income statement, the huge improvement in reported pre-tax profit was down to three elements: an absence of impairment charges, a favourable comparison with the painful Oman airport contract cancellation in 2015, and a £15.5m gain on the closure of the group's UK defined benefit pension scheme.

There was further encouragement on the contracting front, with order intake up 22 per cent in the period, of which just under half came from continuing operations. This year, resolutions to US Federal funding are likely to push some contract awards back into the second half of the year.

Analysts at Investec upgraded their earnings projections on these numbers, and now expect EPS of 136.7p this year and 144.3p in 2018, along with pre-tax profit of £123m and £133m, respectively.

ULTRA ELECTRONICS (ULE)

ORD PRICE:2,107pMARKET VALUE:£1.49bn
TOUCH:2,105-2,108p12-MONTH HIGH:2,180pLOW: 1,573p
DIVIDEND YIELD:2.3%PE RATIO:25
NET ASSET VALUE:516p*NET DEBT:71%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201276179.888.140.0
201374549.354.842.2
201471421.529.844.3
201572634.835.746.1
201678667.682.847.8
% change+8+95+132+4

Ex-div: 6 Apr

Payment 4 May

*Includes intangible assets of £589m, or 836p a share