2nd Mar 2015 13:19
LONDON (Alliance News) - Ultra Electronics Holdings PLC saw its shares drop on Monday after the termination of its Oman Airport IT contract caused its pretax profit to more than halve in 2014 and as revenue was further hit by issues in the US defence market and slow sales in the UK rail and nuclear sectors.
The company's pretax profit fell to GBP21.5 million from GBP49.3 million in 2013, driven down by a GBP46.9 million charge taken on the Oman contract, which was formally terminated last week. Excluding the termination of its Oman Airport IT contract, pretax profit rose to GBP68.4 million against GBP45.1 million. Underlying pretax profit, stripping out both the Oman deal and other one-off costs, was broadly flat at GBP112 million against GBP112.6 million a year ago.
Ultra shares were down 4.7% to 1,715.00 pence on Monday afternoon, the worst performer in the FTSE 250.
Revenue for the year fell to GBP713.7 million from GBP745.2 million in 2013 including the termination of the Oman deal. Stripping that out, revenue ticked down slightly to GBP702 million against GBP703.5 million, with a robust performance in its Tactile & Sonar Systems business offset by a big fall in revenue in its Information & Power Systems business and a flat performance from its Aircraft & Vehicle Systems unit. Underlying order intake in the year was up 21% to GBP760 million, Ultra said.
Ultra said it will pay a final dividend of 31.1 pence per share, against 29.5 pence a year earlier, and said its total dividend for the year would rise 5.0% to 44.3 pence from 42.2 pence in 2013.
"In 2014 group order intake increased significantly, reflecting demand across our market segments for Ultra's specialist capabilities. Market conditions, specifically government spending pressures in the US and UK, continued to frustrate revenues in 2014, although excluding Oman the second half performance showed an improvement on the first half," said Rakesh Sharma, Ultra Electronics' Chief Executive.
"Within the group, good progress has been made in implementing market facing initiatives whilst continuing prudent cost management. The events that culminated in the early termination of our Oman Airport IT contract provided an unwelcome distraction, although this will allow us to bring to a head what is a unique and increasingly difficult commercial contract. The group intends to vigorously pursue all options towards a satisfactory settlement," Sharma added.
Sharma also said Ultra expects its performance in 2015 to be benefit from acquisitions it made in 2014 and from more favourable foreign exchange rates. But he said the overall performance in 2015 is set to be "broadly stable" due to an uncertainty over the timing and feasibilty of proposed budgets for the US Department of Defense, along with election activity in both the US and UK which is likely to breed uncertainty.
Ultra's Information & Power Systems division was the hardest hit by the Oman contract termination, with revenue dropping to GBP204 million from GBP276.8 million last year. Prior to the formal termination of the deal, sales from the Oman Airport IT deal had fallen already.
The Oman problems exacerbated other issues within the division, which has also been hard hit by delays in the US defence and security contract placement process, with weaker demand for both high margin law enforcement and security products and communication systems.
Ultra also reported declining revenue in its rail power management business, hit by the maturation of the commuter power market as the focus in the UK moves towards high speed rail. Its nuclear business in the UK was also hit by lower reactor control and instrumentation revenue following the partial shutdown of the Heysham nuclear power station and the extended decision-making progress regarding the Hinkley Point C project.
Aircraft & Vehicle Systems revenue was GBP140.3 million in 2014 against GBP140.9 million a year earlier, but underlying operating profit fell 29% to GBP24.6 million from GBP34.8 million and the order book was down 2.2% to GBP160.2 million at year end. Aerospace revenue within the division increased, boosted by a GBP60 million contract with Airbus to design, develop, supply and support an electrical ground door operating system for A350 jets.
But those contract wins were offset by lower sales for accessories and spares over the year, while margins in the division were dragged lower by increased research and development spending and lower margins in the engineering phase of contracts including the Embraer KC390.
Tactile & Sonar Systems revenue rose 13% in 2014 to GBP369.4 million from GBP327.5 million, while profit in the division increased 30%, boosted by increased volume and margins in sonobuoys along with savings related to the restructuring of its TCS business.
But analysts remain confident on the outlook for Ultra, with Liberum seeing further acquisition potential for the company and Investec saying "it will get better".
Liberum said the 2014 results, excluding the Oman effects, were in line with its expectations, though it said it sees a flat 2015 for the company and expects consensus earnings forecasts for this year to drop by around 5%.
"Strong underlying order intake, currency tailwind and last year's acquisitions aren't enough to offset a more cautious outlook for US and UK defence expenditure combined with the Oman airport contract termination," said Liberum analyst Ben Bourne.
Liberum said Ultra continues to consider large acquisitions as more targets are becoming available, and forecasts the company may spend more than GBP150 million on further acquisitions.
Investec said "it will get better" for Ultra, adding it sees "short term pain, long term gain" for the company.
Investec analyst Rami Myerson said the 2014 results were modestly ahead of the broker's profit expectations, with net debt in line. Myerson added the broker has reduced its estimates for 2015 and 2016 by 5%.
"We expect organic revenue growth to decline mid-single digit in 2015 before recovering in 2016 and accelerating thereafter," Myerson said.
Both brokers retain a Buy rating, with Investec keeping its price target at 1,960p, and Liberum reiterating its price target at 1,985 pence.
By Sam Unsted; [email protected]; @SamUAtAlliance
Copyright 2015 Alliance News Limited. All Rights Reserved.
Related Shares:
ULE.L