Berenberg reiterates 'buy' on Ultra Electronics but cuts target price

Ultra Electronics was left with a ‘buy’ rating but had its target price lowered to 2,000p from 2,100p by Berenberg on Tuesday.

Berenberg raised the earnings per share forecast for fiscal years 2017 and 2018 by 2% to reflect the company’s positive half year interims and an improving organic growth outlook. The revised price target "places the stock in line with the sector", the broker said.

The company - which supplies electronic products to the defence, security, transport and energy industries – reported in August a pick up in first half organic revenue performance to a decline of 2.5% from a drop of 11.9% the same period a year ago.

Ultra said US defence spending had increased along with the order book. The group’s acquisition of electronic warfare business Herley also contributed to growth. As a result, the company narrowed its organic revenue growth guidance range for 2016 from -2% to +3%, to -1% to +1%.

“Following severe organic decline over the past four years driven by both demand weakness from the US Army for high margin radios during the Iraq and Afghanistan retrenchment (a loss of £40m of EBIT peaking in 2011 to today) and the 2014 cancellation of the Oman IT Services contract, 2016 guidance of -1% to +1% organic growth primarily reflects confidence in US award momentum with the expectation that the allocated budget will be spent this election year,” said Berenberg.

Berenberg said the Herley acquisition has enhanced Ultra’s capability offering in electronic warfare, which is a prioritised area of spend in the US defence budget.

“It also raised Ultra’s group revenue exposure to the Department of Defense (DoD) customer to 30% which we consider to be positive given the geo-political macro backdrop and our thesis that the defence cycle has turned.”

However, Berenberg anticipates a pause in acquisitive activity after buying Herley in 2015 for $265m and the disposing of the ID Cards business in the second half for £22m.

“We are supportive of this approach, particularly against the backdrop of post Brexit currency volatility.”

Shares rose 0.18% to 1,683p at 1043 BST.