Ultra Electronics Holdings PLC

British-based Ultra Electronics Holdings PLC (ULE) offers solutions and products in the security and cyber, transport, energy, and aerospace and defence markets, by exercising electronic and software technologies. The company’s operations are differentiated in three operating segments: Aerospace & Infrastructure, Communications & Security, and Maritime & Land. The group’s market-facing segments are C2ISR, Aerospace, Nuclear, Underwater Warfare, Communications, Land, Maritime, and Infrastructure.

The company will announce the Q3 trading statement in November 2019.

Recent News
On 5^th September 2019, the company announced that Ami Sharma would step down from the finance director role and from the Board. He will leave the company on December 31, 2019. The company also announced that Jos Sclater would join the company.

On 16^th August 2019,the group’s joint venture with Sparton DeLeon (ERAPSCO) was awarded a contract with respect to the United States Navy worth up to USD 1.04 billion. It is an Indefinite Delivery Indefinite Quantity (IDIQ) contract with a validity of five years which signifies the inclination of the United States Navy on anti-submarine warfare. The company, along with Sparton Corp, will receive subcontracts with respect to production worth $75.75 million and $75.26 million respectively.

Financial Highlights (for the six months to 30 June 2019, £million)

(Source: Interim Reports, Company Website)

In the first half of 2019, the company’s reported revenue surged by 10.4% to £387.1 millionagainst the same period in 2018, while organic revenue surged by 6.6%, due to enhanced conditions in the US market. The reported order book rose by 4.6% to £1,014.1 million in H1 FY19 against the £969.2 million in H1 FY18, while on an organic basis, order book surged by 6.6%. The order book expanded because of the improved defence budgets, notably in the United States, and some main wins on new and existing programmes.

Underlying earnings per share surged by 16.4% to 52.5 pence in H1 FY19 as compared to 45.1 pence in H1 FY18, while statutory earnings per share rose by 116.5% to 43.3 pence in H1 FY19. The interim dividend per share stood at 15 pence, a surge of 2.7% from the previous year same period data. Net Debt to EBITDA reduced to 1.32x in H1 FY19 against the 1.39x in H1 FY18.

Share Price Performance

Daily Chart as at October-30-19, before the market closed (Source: Thomson Reuters)

On 30th October 2019, Ultra Electronics Holdings PLC shares were trading at GBX 1,933 at the time of writing before the market close (at 2:06 PM GMT), down by 0.361% against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,294/GBX 1,200. The company's stock beta was 0.64, reflecting the lower volatility as compared to the benchmark index.

Valuation Methodology


Conclusion
The company had shown a decent trend in the top-line and bottom-line performance in the first half of 2019. The company was mainly benefitted from the stronger markets, continued organic revenue growth, and decent order book development. The key markets will continue to grow with the robust technology base positions. Brexit and supply chain risk headwinds might affect the business operations. The company faces several uncertainties and potential risks in the remainder of 2019, that may have a material impact on its performance. In the United Kingdom market, the defence budget stays under pressure. Moreover, the company’s stock is trading near 52-week high, raising doubts at its upside potential at the current price level.

Based on the above rationale and valuation done using the above methodology, we have given a "Watch" recommendation at the closing price of GBX 1,940 (as on October 29, 2019), based on the 15.6x NTM Price/Earnings (approx.) on the FY19E earnings per share (approx.), while we look for any upcoming catalysts.
 
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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