Ultra Electronics (ULE LN, £1.4bn) Q3 19 trading update confirms trading in line with expectations reporting “good order book development” since H1 results. | Tyman (TYMN LN, £405m) trading update expects revenue & adj. op profit to be “in line with current market expectations”; European & UK markets have weakened since H1, North America “broadly flat with no clear signs of a return” | Ceres Power (CWR LN, £348m) announces successful development of its first zero-emission combined heat & power system, designed exclusively for hydrogen use
Companies: ULE TYMN CWR
The overall picture of improving global defence spending supports a return to organic growth for UItra. This is already reflected in the uplift seen in the order book at the H118 report. The company is well positioned to leverage the growth in naval budgets and increased demand for military aircraft around the world. Ultra also has a significant role to play in commercial aerospace, energy and cyber markets. Our fair value is 1,918p.
Companies: Ultra Electronics Holdings plc
Ultra’s pre-close trading statement certainly contains reasons for optimism, especially better than expected order development. However, the continuing issues at Herley have led to a reduction of up to £6m in operating profit expectations for the group as a whole in FY18. The problems are no longer attributable solely to the larger than anticipated number of development contracts won, but clearly indicate unexpectedly high costs. The impact reduces FY18 EPS expectations by 6.7%, but should be contained to this year, with still good prospects for the production phases. Our fair value remains relatively unchanged at 1,811p from 1,816p previously.
Ahead of its AGM Ultra has released a first quarter trading update that indicates no change to management expectations. The company still expects to make modest progress on a constant currency basis, although it will face FX headwinds. Encouragingly, despite the adverse exchange rate movement the order backlog at the end of the quarter stood at £933m, some 2% higher than at the start of FY18. An increased weighting to the second half of cash and earnings performance is still expected. The shares trade on a relatively low P/E against many UK peers, but the discount should start to diminish if operational execution continues as planned.
FY17 results were in line with the guidance reset by management in Q417, with cash performance ahead of expectations. The outlook for FY18 has some acceleration in organic sales growth, tougher FX assumptions, higher investment levels and the adoption of new accountings standards. Combined, this trims our revenues and margins estimates modestly. The proposed merger with Sparton Corporation has been terminated following the outcome of the anti-trust review in the US. While not ideal, US demand for sonobuoys remains strong and trading through the existing JV should continue. Return of cash to shareholders through a buyback reimburses the funds raised last year to fund the purchase. Growth is accelerating modestly, and our fair value stands at 1,816p.
Ultra has issued a reassuring post-close trading statement. The company has delivered continued order growth and demonstrated strong cash conversion. The search for a new CEO continues. While the company has identified future areas for investment to deliver long-term growth, Ultra will deliver modest progress in FY18 as it continues to leverage its strong market positions. The statement should help allay investor concerns over profitability that has been weighing on the shares.
While a trading update might have been anticipated the departure of the CEO is a major surprise. The return of the Chairman to the CEO role as an interim measure provides an element of reassurance and continuity, as does the commitment to an increased final dividend despite a cut of 9% to FY17 EPS. The UK declines are concerning, however it is not the largest regional contributor. We believe the larger US and export market contributions and recent order intake should provide a solid foundation for future growth, with the invest and grow strategy to remain in focus.
Almost a quarter of the Group's share price has been swiped with the news UK defence spending has slowed and its Chief Executive has left.
It is appropriate to describe the H117 results from Ultra Electronics as flat. Revenues, operating profit, profit before tax and EPS growth (all on an underlying basis) varied by less than 0.5% when compared to the prior year. The company still anticipates a bigger skew in organic growth to H2 than in previous years. There is further fine-tuning to our EPS estimates, which we have lowered by 1%. The dilution from the placing in July depresses EPS until the reinvestment in Sparton completes, which is expected at the start of FY18. The subsequent uplift should coincide with higher organic growth following the improved momentum in H217.
More positive news from Ultra Electronics, as it has announced it has been awarded a contract from the Indian MOD to supply the Indian Navy defence systems. It is a three-year contract, with an initial engineering phase likely to generate lower revenues and margins followed by production deliveries weighted to the second half of its term. It will not make a meaningful revenue contribution in 2017 but should build from 2018 to 2020. H117 results are due on 7 August, which should provide an update on the recently announced offer for Sparton Corporation. The related share placing temporarily dilutes EPS.
The previously indicated interest in Sparton has now been formalised with a $23.5 per share cash offer valuing the NYSE-listed company at $234.8m (£180.6m). This is a 28% premium to the value at the close on 30 June ahead of the previous announcement. The offer appears financially compelling and will be funded through a share placing representing c 9.99% of Ultra’s existing capital raising £133m net with the balance from existing debt facilities. As the deal is immediately EPS-enhancing following completion in early 2018 and should create value in 2019, notwithstanding the proposed disposal of MDS, it appears a logical and focused expansion of Ultra’s core business.
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The group’s year-end update points to stronger than expected Q4 trading, boosted by robust sales in North America that translated efficiently to upside on profitability expectations. Cash performance has once again been stellar, resulting in net cash of $35m, considerably higher than forecast, partly profit drop-through and partly from tight working capital management. We are therefore upgrading our FY 2020 EPS by 25% to 33.2ȼ. The strong cash position also results in a boost to the total dividend, giving a dividend yield of 6.7%. We raise our price target from 285p to 435p, based on a target P/E of 17.0x offering upside to the current P/E of 13.8x.
Companies: Somero Enterprises, Inc.
Inspiration Healthcare has announced it expects revenues and profits for the year ending January 2021 to be ahead of market expectations. Revenues are expected to be at least £36.5m and adjusted EBITDA at least £4.9m. We have moved our FY21E forecasts into line with these expectations, which are c3% and c11% ahead of our previous forecasts for sales and adjusted EBITDA, respectively. We note the key driver of the upgrade was performance at S.L.E., which Inspiration Healthcare acquired in July 2020. We reiterate our Buy recommendation on Inspiration Healthcare.
Companies: Inspiration Healthcare Group PLC
Last night, Qualcomm delivered a keynote speech at its Automotive Redefined event where it iterated its partnership with Seeing Machines for DMS on its ‘Snapdragon Ride' platform. In the same keynote speech Qualcomm noted that it has won 20 different OEMs (through many different tier 1 suppliers and partners, including Seeing Machines) which are going into production in 2021 with its Gen 3 Snapdragon Ride platform. We do not see this as meaning that these OEMs will automatically adopt Seeing Machines DMS in 2021 for these platforms (other PR materials imply the optimised DMS solution is not yet ready), but the implication from the Qualcomm slide (on the page 2) is that a number will. We also believe it is unlikely that these OEMs will chose an alternative DMS solution for these vehicles when they want or require it. With regulatory compliance needed for NCAP and EC by 2024, it is our view that most of these OEMs will eventually source Seeing Machines DMS for at least their EU sales using the scalable Gen 3 Snapdragon Ride platform. In a separate press release Seeing Machines and Qualcomm have also announced a deepening collaboration with Seeing Machines further optimising its technology stack for the Snapdragon Automotive Cockpit Platform architecture as the two companies market the combined framework to automotive Tier-1s and OEMs. In addition, Seeing Machines's previously announced Embedded Development Kit (EDK) for Qualcomm's Snapdragon Automotive Cockpit Development is now available to select Tier 1 and OEM customers. We increase our target price to 12.9p from 8.6p based on increased confidence in our long-term automotive market share expectations.
Companies: Seeing Machines Limited
TP Group experienced a material improvement in trading in H2/20, with the period accounting for nearly two thirds of the group's £3.8m FY20 Adj EBITDA, mainly due to the timing of some larger contracts. The order book remains robust at c£69m (up c20% YoY); however, the pandemic continues to create uncertainty around the timing of contract deliveries, and consequently, our forecasts remain withdrawn and our rating Under Review. Notwithstanding, we believe the significant operational changes made over the past year help to accelerate the business' software and consulting services, and leave the group well positioned for future growth.
Companies: TP Group Plc
Today’s FY20 trading update indicates that the business did not miss a step in FY20. Underlying profitability was very marginally ahead yoy and net debt has peaked and, with the factory move completing later this year this, will fall increasingly quickly. Looking forward, FY21 will see significant growth, underpinned by the LAICA contribution, but importantly underlying organic growth is expected to be c.10%. Trading has started well in the new financial year providing confidence in forecasts at this early juncture. Strong organic and acquisitive growth drives an 10% increase in profitability and the dividend for FY21. With the platform to deliver significant growth in revenue and earnings over the next five years, 15.5x current year earnings is appealing. Particularly for a business with such defensive cash flows. This is evidenced by a prospective dividend yield of 3.6%. We increase FY20 profit forecasts marginally to reflect guidance in today’s statement and lower net debt.
Companies: Strix Group PLC
Although 2020 will probably go down in history as one of the most challenging years experienced during our lifetime, it will also likely be chronicled as one of the best years for the recognition and appreciation of science. As we entered 2020, the COVID-19 pandemic was in its infancy. However, it rapidly evolved through the exponential rise in infections and mortality globally. Much has been achieved during the past 12 months in the fight against COVID-19, but, as we enter 2021, there are considerable concerns about the emergence of a mutant version of the virus and the second wave that we are now facing.
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Itaconix has confirmed a positive conclusion to FY20, with revenue, EBITDA and net cash all slightly ahead of expectations. This builds on the positive trends reported in October’s interims, driven by successful customer product launches. Itaconix enters FY21 with good momentum and strong sustainability credentials. We plan to introduce FY21 forecasts alongside full year results.
Companies: Itaconix plc
Filta's FY20 trading update confirms a much stronger performance for the group in H2 versus that in H1, boosted by an increasing number of customers opening up during the summer period. Despite Covid-19 significantly affecting the restaurant and leisure sector, a strong focus on cash management meant that Filta reduced its net debt (excluding leases) by £0.4m YoY to £0.5m. With a healthy sales pipeline, solid balance sheet cash position (£4.2m), and vaccine roll-out progress, management has more certainty in the business' outlook than at any time over the past 12 months. Notwithstanding, the speed at which trading conditions will return to normal remains unclear (eg potential impact from new strains of the virus emerging, unexpected delays in vaccine production etc). As such, we refrain from reinstating forecasts, and maintain our Hold rating.
Companies: Filta Group Holdings PLC
Directa Plus has had its contract with OMV Petrom extended and increased. The contract, initially awarded in July 2019, was for the provision of decontamination and oil recovery services using the Company's proprietary Grafysorber® technology. The initial value of the contract was €150k (of which €75k was delivered and invoiced in 2020) and this has now been increased to €410k, the balance of which is expected to be fulfilled by June 2021.
Companies: Directa Plus Plc
The Group made strategic progress in FY20A despite the onset of COVID-19. Management acted swiftly implementing a strict cost reduction programme, ensuring robust cash management. This combined with strengthening the Board and management teams, exploring new revenue streams and investing in technology to drive efficiency gains has positioned the Group to overcome short-term demand fluctuation. We are confident the Group will capitalise on the operational gearing within the business as demand levels revert to pre-pandemic levels. Corollary to this we expect financial performance to materially improve in H2/21 and beyond.
Companies: Velocity Composites Plc
Capital Limited has released its Q4 and FY2020 trading statement this morning. Overall it shows 2020 was a strong year for the company with revenue growing 18% and most other operating metrics growing positively with it – see Fig 1. We have adjusted our forecasts accordingly and also to take into account the mining services contract for the Sukari Mine which the company won late last year. The latter is a game changer for Capital and its investment case in our view; turbo charging revenue growth, enhancing margins and diversifying cashflow all of which should lead to materially higher valuation multiples. We raise our PT to 127p.
Companies: Capital Limited
Journeo is a specialist provider of information systems and technical services to the transportation sector. This morning, the group has announced that under its existing Transforming Cities Fund framework contracts, it has received further orders for its advanced public transport information systems.
Companies: Journeo plc
Journeo is a specialist provider of information systems and technical services to the transportation sector. Following on from Friday's announcement confirming a further £1.3m order under the Transforming Cities Fund framework, the group has this morning announced a 1-year extension to its existing framework agreement with First Bus, worth an estimated £1.8m, the majority of which is expected to fall into the current financial year.
Initiating with a Buy rating. We initiate our coverage of Proton Motor Power Systems (“Proton Motor”) with a BUY rating and a target price of 201p. Our valuation equates to a market capitalisation of £1.47bn, compared to a current share price of 65.5p and a market cap of £479m.
Companies: Proton Motor Power Systems Plc
Today’s trading update indicates that revenue continued to recover during the second half of FY20. For the year it declined 15%, to £95.1m, but H2 saw an improvement with it declining 8% yoy. This indicates that trading in the final quarter improved materially and is likely to have been low single digit down yoy. Net debt of £11.7m is significantly better than the £14.5m reported at the end of June and shows a continuation of the improvement seen over the previous 18 months. The Company has already stated that it will fall again in FY21. £1.6m of cost savings had initially been identified and an additional £1.0m announced at the interims. Good progress has been made on the initial target, albeit lockdown restrictions are causing a delay in some areas.
Companies: Flowtech Fluidpower plc
