3rd Aug 2015 13:28
LONDON (Alliance News) - Defence company Ultra Electronics Holdings PLC on Monday posted a big fall in pretax profit for the first half of the year, hit by a further writedown from the loss of its contract in Oman and by continued subdued activity in the US and UK defence markets, but it once more affirmed its guidance for the full year.
The FTSE 250-listed company said its pretax profit for the six months to the end of June was GBP14.8 million, significantly lower than the GBP45.8 million it posted a year earlier. Revenue fell to GBP331.7 million from GBP341.0 million, as administrative expenses rose and the group booked a GBP16.4 million one-off cost from the liquidation of its Ithra vehicle following the termination of its Oman Airport IT contract.
The Oman Airport IT deal, which was terminated formally in January, was a thorn in Ultra's side in 2014, when a non-cash provision it booked against the loss of the deal more than halved its pretax profit and dragged lower what would have otherwise been broadly flat revenue.
Ultra said activity in the US and UK defence markets remains subdued and its order book has declined in value to GBP762.1 million at the end of June, from GBP876.8 million a year earlier. It said, however, that this provides visibility on 83% of its full-year revenue expectations
The company said it will pay an interim dividend of 13.8 pence per share, up from 13.2p a year earlier.
"The group's first half performance is in line with our expectations and reflects a generally lower level of activity across most parts of our government-related business, and the expected pause in normal business given the UK and US election cycles. The uncertainty surrounding the next US fiscal budget and the potential of a Continuing Resolution in relation to government appropriations has continued to dampen US defence revenues," said Rakesh Sharma, Ultra's chief executive.
"Further, recent challenges to the Patriot Act are impacting revenues from our US Sotech business and, as previously advised, working capital movements and the impact of the Oman contract termination are reducing cash conversion," Sharma added.
"The full-year performance is weighted to the second half of the year and is expected to remain in line with previous guidance of a stable 2015 performance," Sharma said.
Sharma's affirmation of Ultra's guidance for the year was the third time the company has said it would meet its expectations for the full year, following the profit warning it issued for 2014 due to the termination of the Oman Airport IT deal, and helped to reassure investors.
Shares in Ultra were up 1.5% on the news Monday to 1,771.00 pence, one of the best performers in the FTSE 250.
The main profit and revenue hits for Ultra came within its aerospace and infrastructure business, though it saw a mixed performance across its divisions due both to troubles with major contracts, such as the Oman deal, and due to generally subdued activity in defence markets.
Aerospace and infrastructure division revenue for the group was down by 12%, and the order book dropped sharply to GBP243.1 million from GBP353.8 million largely thanks to the Oman Airport IT deal's termination. Ultra blamed that deal for the majority of the revenue decline, though the general lower level of government spending was reflected in a slowdown in aftermarket sales and the timing of Joint Strike Fighter controller deliveries.
UK nuclear revenue was lower due to issues facing faced by French power company EDF with its UK reactor fleet, while Ultra also saw weaker revenue contributions from ICE Corp and Lab Impex Systems year-on-year.
Communications and security division revenue was up by 5% in the half, driven by the contribution from the Forensic Technology, the document security and analytics company Ultra bought in 2014, and better revenue from the cryptography contract it handles for the UK's Ministry of Defence. This was offset, however, by the slowdown in US defence procurement activity and the loss of revenue from its high-margin special operations technology business. The order book for the division also declined, down 18%, due to lower US contract placement and trading of the cryptography deal.
Maritime and land revenue for the group fell in the half, with increased sales in Australia and the US offset by the general defence market sluggishness and a reduction in revenue from the phasing of its Fatahillah contract with Indonesia's Ministry of Defence. Margins in the business also were hit by the release of some contract risk reserve and by an adverse product mix in its sonobuoys business.
Rami Myerson, an analyst with Investec, said Ultra has good visibility going into the second half, despite the challenging conditions in the US market. Myerson said the last few years for Ultra have been "difficult", but the broker is increasingly confident that the company will return to organic growth, deliver stable margins, and improve its cash generation and conversion ratio from 2016 and beyond.
By Sam Unsted; [email protected]; @SamUAtAlliance
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