The market received the Ultra Electronics Holdings (LSE: ULE) interim results report this morning with a lack of enthusiasm and the shares are down around 4% as I write, but I reckon the firm is building value and has a good record of raising its dividend.
Weighted to the second half
To put the results in context, chief executive Rakesh Sharma cautions that he expects 2017 to be “more heavily weighted to the second half than normal”, so I reckon we should look past this morning’s lacklustre figures where revenue and underlying earnings came in flat compared to six months ago. The directors showed their confidence in the outlook by raising the interim dividend by 2.8%.
The firm applies electronic and software technologies to create solutions and products in the defence, aerospace, security, cyber, transport and energy markets – a business that is sensitive to national defence budgets. Mr Sharma tells us that the US federal budget was not approved until May and that delay, together with the UK General Election, caused the progress of some contract awards to slip. On a brighter note, strong order intake in the final part of the period continues.
Improving order book and acquisitions
The firm’s order book increased 2.8% to around £808m compared to a year ago and also showed improvement from the £799m figure at the end of 2016, momentum that the top executive expects to continue throughout 2017. Meanwhile, the organic growth is backed up by the directors’ hunt for compelling acquisition opportunities, of which last month’s announcement of a conditional merger agreement to acquire New York Stock Exchange-listed Sparton Corporation is a recent outcome.
Prior to this acquisition, Ultra Electronics had been working in a long-standing joint venture with Sparton developing, manufacturing and supporting all US sonobuoys supplied to the US Department of Defense. The company reckons the acquisition of Sparton should enhance Ultra’s continuing relationship with the government body and increase exposure to the growing sonobuoy segment, which should lead to attractive financial returns.
But Ultra is not afraid to get rid of businesses too, and cites the disposal a business in August 2016 as causing a 2.7% decline in revenue for the most recent period. On top of that, organic revenue dropped 6.7% due to contract-award delays, but exchange rate movements more than offset these declines, boosting the overall result on revenue by 9.3% to deliver the flat figures reported today.
Steady growth
Such nipping and tucking with regard to acquisitions and divestments, and a solid-looking organic business, means City analysts following the firm expect earnings to lift 2% this year and by 6% during 2018. Today’s 1,991p share price puts the company on a forward price-to-earnings ratio just below 14 for 2018 and the forward dividend yield runs at almost 2.7%. This is not a bargain valuation but the sector seems steady and Ultra has a good record as a dividend-raiser, lifting the payment by 25% over the past five years.
I like Ultra Electronics as a potential long-term, dividend-paying hold because the share price chart is historically steady without too many nausea-inducing undulations, suggesting a durable underlying business.
