Ultra Electronics Holdings PLC (LON:ULE) has been downgraded to ‘hold’ from ‘buy’ by European broker Kepler Cheuvreux on valuation grounds based on a raised target price for the stock.
Analysts at Kepler said that despite first-half results indicating that “organic growth will resume”, the FTSE 250-aerospace and defence firm’s free cash flow (FCF) “appeared to be under some pressure, as [capital expenditure] and working capital could rise”.
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“The order book up 19% organically and sales growth up 1.3% are positive indicators of Ultra finally returning to organic growth, six years after having entered an unprecedented period of organic decline,” said Kepler’s analysts in a note, although they added that due to raised capital expenditure guidance to £20mln from £15mln, declining prepayments on overseas orders, and the appearance of supply chain shortages meant it was “unclear whether Ultra will stick to its 85% cash conversion guidance beyond [the 2018 financial year]”.
The broker also expected Ultra’s chief executive Simon Price to announce additional cost reduction efforts in a strategic review to be unveiled in March 2019, in addition to “higher investments in core skills and capabilities” and “improved discipline in [merger & acquisitions] criteria, as recent M&A has not delivered in line with plans”.
As a result of its revised estimates, the broker raised its target price to 1,720p from 1,650p, “assuming higher organic growth (from 3% to 4%), but lower FCF conversion”, with a limited upside to the current share price justifying the new ‘hold' rating.
In mid-morning trading Tuesday, Ultra Electronics shares were down 9.4% at 1,539p.