The defence firm is integrating a previously fragmented business model
Thursday 10 Oct 2019 Author: Tom Sieber

A slight pullback in the share price for defence firm Ultra Electronics (ULE) represents a good buying opportunity.

A 2019 price-to-earnings ratio of 16-times does not look demanding with scope for the company to beat earnings forecasts as the benefits of a revamp of the business come through.

Simon Pryce took over as chief executive in June 2018 after a tricky period for Ultra, reflected in the ousting of long-standing chief executive Rakesh Sharma in November 2017 and lots of institutional investors betting that the share price would fall. Pryce also had to issue a profit warning shortly after assuming the role.

Essentially Pryce’s diagnosis was that the business was just too fragmented. In March, alongside the maiden full year results under his tenure, he observed that of around 130 capabilities offered by the company, 29 were responsible for 85% of its revenue.

Although this reveals the need for a more integrated approach, it also highlights that Ultra is a quality outfit with a weight of impressive intellectual property. The shares have started to recover this year but an update on the integration process could act as a further catalyst for the share price when unveiled early next year.

Many of its competencies are in areas being prioritised in global defence spending such as marine and cyber warfare. Investment bank Berenberg comments: ‘Ultra’s broad range of niche technologies and capabilities, including anti-submarine warfare and cyber security, are likely to remain high-priority areas for government spending.’

US defence spending increased for a fifth consecutive year in 2019 and is budgeted to increase by a further 3% in 2020.

At a time when there are concerns about global growth, Ultra’s relative insulation from the gyrations of the global economy could provide some welcome ballast to portfolios.

Supported by this positive backdrop, Pryce has already achieved some significant milestones in his transformation of the group. A return to organic growth for 2018 was announced in March this year and half year results in August revealed an order book above the £1bn threshold for the first time since 2011, underpinning forecasts for organic revenue growth of around 3% or higher.

It is worth noting this order book does not include positions on several longer term defence programmes, where firm orders are expected but are yet to be placed.

Risks for investors to weigh include continuing weakness in the UK defence market and an ongoing probe by the Serious Fraud Office into potential corruption in Algeria.

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