Ultra Electronics shares break out after firm signals 'very good visibility'

Ultra Electronics resumed dividend payments after recovering "very good visibility" for the back half of the year.

The defence and security specialist grew both its top and bottom lines, while sharply improving its cash conversion and order book.

Chief executive officer, Simon Pryce, said the company's major markets remained stable, although the headwind from commercial aerospace was expected to intensify over the remainder of the year.

So too, the tailwind from lower selling, general and administrative costs was expected to fade as those stabilised.

"Despite this, we remain confident that 2020 will, as anticipated, be a year of good progress for Ultra," he added.

The order book fattened by 15.7% on a reported basis to reach £1,173.2m. with sales ahead by 6.7% to £413.1m.

Significant contract wins during the period included a $101m order for sonobuoys and another $45m order for its MK54 lightweight Torpedo array.

It was also awarded a contract to provide software for the US Marine Air Defense Integrated System against drones and another to help secure America's Link 16 network over the Alaskan air space.

To take note of, defence spend in all of the company's key "five-eyes" markets was described as "robust".

In turn, underlying profits before tax rose 3.0% to £47.9m for earnings per share of 54.7p.

On a statutory basis however, profits before tax dropped 21.4% to 29.8p due to losses on its foreign exchange contracts as Sterling weakened.

Management also indicated that some of the initiatives under its ONE Ultra transformation programme to optimise the organisation might be accelerated in the back half of the year.

The company's cash conversion jumped from 25% to 98%, resulting in an increase in its operating cash flow from £14.0m to £61.3m.

As a proportion of earnings before interest, taxes, depreciation and amortisation net debt fell from 1.96 times to 1.20.

Following the "strong" first half performance and expected full-year outcome relative to their scenario modelling for Covid-19, the board decided to undertake an additional interim dividend of 39.2p per shares which would equal the postponed final payout for 2019.

The regular interim dividend meanwhile was raised by 2.7% to 15.4p.

But the company said the proposed amount for the interim payout had been influenced by remaining cautiousness due to the pandemic.

As of 0905 BST shares of Ultra Electronics were breaking out to fresh record highs, jumping by 9.14% to 2,388.0p.

Stock in Ultra Electronics was changing hands on a price-to-earnings multiple of 22.8 but on a price-to-sales ratio of just 2.0.

Peel Hunt analyst Henry Carver reiterated his 'buy' recommendation for the shares following the company's latest results, telling clients that "Ultra’s end markets are robust and the outlook is positive".

He also argued that the firm's margin profile was attractive with "plenty more to go" from the self-help initiatives already underway, while the management team's efforts to change the culture "with positive effects already coming through".

His 2,400.0p target price for the shares equated to a 2021 price-to-earnings multiple of "just" 18 times, which he termed "undemanding" in comparison to Chemring on 17 times and Avon Rubber on 31 times.

At present, he said, the shares were changing hands at 16.5 times' forward earnings for 2021.