Ultra Electronics: Preliminary Results

Ultra Electronics’ results highlighted that despite the current challenging defence environment, the group has a robust position from which to identify and pursue growth. However, with sequestration now a reality, the question is how budget cuts can be implemented and the potential impact that may have on such growth prospects. Importantly, Ultra has several strands of business that will remain largely unaffected by sequestration and we believe the U.S. government will eventually find a solution to allow more targeted cuts to occur, providing protection for strategic priorities. In that case, we believe Ultra’s positioning in areas of preferential spend and its agile business model will allow it to mitigate macro level challenges.

2012 Results Slightly Ahead Of Forecasts
Ultra was able to achieve a solid set of results, with revenue up 4% to £761m, driven by growth in markets outside defence (transport, energy, security and cyber). A 1% currency benefit and the 7% acquisition contribution more than offset a 4% organic decline. Margins were broadly maintained above 16%, despite a step-up in R&D investment, while PBT grew by 1% to £115.6m and EPS was up 4% to 124.5p as a result of lower finance and tax charges. Operating cash flow conversion reduced to 73% as working capital built up during an increased capex phase, while the balance sheet remained strong, with net debt to EBITDA of just 0.32x providing ample headroom for further investment. DPS tracked earnings and was up 4% to 40.0p.

Focus On Sequestration And Non-Defence Markets
With sequestration now a reality, the question turns to how the cuts will be implemented. In our view, the US government will be compelled to act to allow a more targeted reduction to spare priority areas of spend, consistent with the priorities set out in the 21st Century defence document, ie the pivot to Asia, focus on cyber and a drive towards upgradability. Ultra has capabilities in each of these areas and we believe it is therefore as well positioned as any to ride out the coming storm. In addition, non-defence markets account for 44% of revenues and contracts and drivers continue to support an increasing contribution over the near term.

Valuation: Robust Results Point To Value Opportunity
Given the robust results, slightly ahead of our, and consensus, expectations, we feel that Ultra yet again provides a value opportunity. Having rolled forward our valuation onto 2013 forecasts and updated for positive market movements, our sum-of-the- parts fair value increases to 1,803p/share. This equates to a rating of 14.0x CY13 EPS, still at a discount to the 14.9x through-cycle average since flotation, highlighting there is further to go once clarity on the exact nature of sequestration becomes clear.

To Read the Entire Report Please Click on the pdf File Below.