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Ultra Electronics transforming at pace

The defence contractor's self-help measures are already generating substantive benefits
July 19, 2021

 

  • Record order book and significant pipeline opportunities
  • Improved showing by the Forensic Technology segment

There were no great surprises, nasty or otherwise, in half-year figures for Ultra-Electronics (ULE), though they were superior to consensus expectations. Aggregate order volume stood at a record of £1.3bn, reflecting growth in advance of 60 per cent over the past five years. And the defence contractor reckons it has a better than even chance of securing pipeline contracts worth an estimated £12bn through to the end of decade.

Revenue pulled back from a year earlier due to supply chain disruptions experienced in Q1 2021, with the group’s Maritime business unit the main casualty. That’s set against rising receipts from The Pentagon for tactical radio equipment and strengthening performance in the Forensic Technology segment, including a $24m (£17.5m) contract covering multiple states in Brazil. Overall, underlying operating profit was up by 16.5 per cent to £62.2m.

The transformation programme is delivering ahead of plan, with greater than expected benefits of £57m by 2024. The extra capital in prospect should not only boost R&D, but also potentially make the group more competitive in the contract bidding process. It is too early to determine the extent to which the programme will benefit profitability, but it’s worth noting that the underlying operating profit margin of 15.4 per cent represents a 260-basis point increase on the 2020 comparator.

Lowly net debt, good order visibility and increased efficiencies will certainly improve any defensive valuation case made by the group’s directors assuming Cobham decides to move ahead with a formal offer on 23 July. The shares are up by 23 per cent since we highlighted the investment case in April 2020, but aren’t prohibitively priced at 18 times FactSet's forward adjusted earnings consensus of 128p a share.

Last IC view: Buy, 2,166p, 28 Jun 2021

ULTRA ELECTRONICS (ULE)  
ORD PRICE:2,336pMARKET VALUE:£ 1.66bn
TOUCH:2,334-2,336p12-MONTH HIGH:2,540pLOW: 1,845p
DIVIDEND YIELD:2.5%PE RATIO:17
NET ASSET VALUE:699p*NET DEBT:13%
Half-year to 2 JulyTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202041329.834.215.4
202140546.252.916.2
% change-2+55+55+5
Ex-div:26 Aug   
Payment:17 Sep   
*Includes intangible assets of £441m, or 619p a share