Ultra has confirmed that it expects trading to be in line with consensus expectations for the current year. We therefore maintain our estimates and will reassess the outlook for 2017 at the full year results in March. By then the new US administration should be in place and the domestic outlook should also be more tangible. While weaker sterling remains a positive, the return to genuine underlying organic growth next year remains a hope at present, rather than a given. The shares have performed well since our Outlook note in September, approaching the fair value of 2,037p. The defence sector has performed over the period, largely reflecting prospects for increased global defence spending following the US election.
Despite delays to securing an Indian contract for torpedo defence systems (downselected in November 2015 but awaiting signature), order development has been encouraging. The delay has deferred trading and thus reduced organic FY16 sales growth. Average FX is slightly improved due to weaker sterling in Q4 (c $1.36/£), and with positive acquisition inputs the overall FY16 outcome is broadly as expected. As the Indian contract should start trading early in 2017, we do not expect any change to organic expectations next year. Cash conversion of 70% in 2016 remains consistent with our estimate and likely to improve in 2017.
Market outlooks remain uncertain. US defence investment budget outlays rose sharply in the final quarter of the US fiscal year (calendar Q3). Outlays in October were less progressive, although maintaining the rolling 12-month average at the higher level. Any improvement arising from the new Trump administration should be more apparent next year, although a continuing resolution will continue into the first quarter of 2017. Oil & gas supported defence export markets are yet to improve.