What fired Ultra Electronics to record high?

The influence of the 'Trump bump' on the defence and aerospace sector continues to be felt after shares in FTSE 250-listed Ultra Electronics soared to another record high following better-than-expected full-year results.

With about 85% of revenues from defence and security, Ultra looks well placed to benefit from increasing global tensions and President Trump's plans for a $54 billion (£44 billion) surge in military spending.

Ultra supplies advanced electronic and electrical systems and equipment to defence forces around the world. Its capabilities also extend to secure communications, networks and high-grade cryptographic equipment, as well as surveillance and intelligence gathering systems.

Meanwhile, the company's safety critical sensors and controls are used in existing and new build nuclear reactors. It also provides specialist software, systems and equipment for use in mass passenger transport systems.

Revenues for 2016 were up 8.2% to £786 million, while earnings per share (EPS) lifted 8.6% to 134.6p. Significantly, the company's operating margin increased to 16.7% and its order intake improved by 22%, with organic order intake up 10.4%.

Ultra's position in the US defence market has been buoyed by the successful addition of Massachusetts-based defence supplier Herley, which it bought for $222 million in 2015 in its largest ever deal. The integration process is running ahead of schedule, with $2.3 million of the cost synergies already realised in 2016.

Ultra did admit Monday that some contract awards will move into the second half of 2017 due to an ongoing impasse on US Federal funding. Investec Securities thinks this could mean revenues weighted roughly 40:60, but with 2018 growth accelerating.

Investec, which has a 'buy' rating on the stock, said that Ultra offered the best value in the UK aerospace and defence sector. The broker believes there's more to come from the stock despite today's record high, and has lifted its target price to 2,250p from 2,160p previously.

As well as the potential US defence spending boost, JP Morgan Cazenove analysts forecast that the stronger dollar versus the pound will provide a translation boost to EPS. They believe that Ultra may also be a potential acquisition target given its size and strong positions in certain niche markets.

If not, there's the potential for further bolt-on deals by Ultra, although these are likely to be smaller than Herley. Under its S3 (Shared Services & Standardisation) scheme, Ultra has allowed legacy companies to share back office functions to save costs but each company remains accountable for winning business and contract execution.

Ultra said this and other efficiencies were a factor in ensuring it remains "lean and ready to exploit the opportunities within its markets".

However, JP Morgan has identified three potential downside risks — the US budget uncertainty, the impact of Brexit on UK government defence spending and the possibility that a lower oil price could dent sales to the Middle East.

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