JP Morgan downgrades Ultra Electronics to 'neutral'

Ultra’s 2017 results, posted a day earlier, were in line with expectations but there was “a lot of info to digest”, the JP Morgan analysts said.

Earnings for 2018 are likely to be about 6% lower than JP Morgan’s forecast due to an accounting change, currency fluctuations and higher research costs. Ultra also said its acquisition of US rival Sparton was blocked on competition grounds.

Ultra and Sparton have a joint venture that sells sonobuoys to the US Navy. The US Department of Justice has announced an investigation into the joint venture and the navy has said it wants more competition for its purchases of sonobuoys.

Sonobuoys make up about 15% of Ultra’s group sales and the US Navy contract is a core part of the company’s business, the analysts said.

Ultra also announced a £134m share buyback to return to investors money raised in 2017 for the scrapped Sparton deal but the timing is unclear, JP Morgan said.

The analysts reduced their December 2018 price target for Ultra’s shares to 1,535p from 1,675p, reflecting lower earnings and a slightly lower target multiple due to the prospect of increased competition to sell the US Navy sonobuoys.

“Given our lower price target, and the rally in the shares from recent lows, we downgrade to 'neutral' from ‘overweight’, the analysts said.