The half year pre-close trading update from Ultra Electronics (LON:ULE) confirmed that the company is performing as expected. The ending of the Continuing Resolution (CR) in the US appears to have eased some of the contract deferrals and, while some normalisation of the monthly outlays should be expected, the return to more standard budgetary process is welcome. This should allow Ultra to experience the stronger second half that has been flagged in previous trading updates and deliver the expected marginal improvement in earnings. The share price has eased modestly over the last quarter, leaving some headroom to our unchanged fair value of 2,257p.
As mentioned in our previous comment, the CR is normally quite a constraint on US DOD contract awards. The CR ended in early May when the FY17 budget was agreed in the US. As a result, May 2017’s DOD investment budget spending (procurement plus RDT&E) was up by 25% compared to the prior year. While the pace of improvement is unlikely to continue, it does reflect the easing of the shackles in terms of short-term contract awards.
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