Credit Suisse hikes target for Ultra Electronics sending shares to 52-week high

Shares of Ultra Electronics hit a fresh 52-week high after analysts at Credi Suisse bumped up their target price on the shares of the defence electronic outfit in the wake of its latest half-year numbers.

The Swiss broker raised its target from 1,900.0p to 2,250.0p following what it said had been a "robust" first six months of 2019 for Ultra, with underlying operating profits and cash conversion both printing ahead of analysts' forecasts.

Driving the higher target, they raised their estimates for the company's earnings before interest and taxes for 2019-21 by 2.0%, 3.0% and 3.0%, respectively, putting then 7.0%, 9.0% and 11.0% ahead of the Refinitiv consensus.

Yet the key fundamental driver was the company's late-cycle exposure to the US Department of Defence with Ultra "typically" lagging US outlay increases by 18-24 months, leading the broker to reiterate its view that the firm was capable of generating "robust" organic revenues over the next three years.

Credit Suisse also highlighted Ultra's order book, which was then already at an all-time peak.

Furthermore, the analysts said: "we also believe that EBIT margins can remain at industry leading mid-teen levels, as operational leverage compensates for further R&D investment. Lastly, we assert that cash conversion can increase in 2020 and 2021, particularly as unbilled receivables are increasingly invoiced in line with US defence growth."

Credit Suisse remained at 'outperform' on the shares.

In terms of potential catalysts for the share price, the broker flagged the Capital Markets Day scheduled for the first quarter of 2020 and possible mergers and acquisition activity in the UK, but said there were risks to Ultra's US sonobuoy market positioning in the late 2020s and for the US dollar-pound exchange rate.