Due to press speculation over the weekend, Ultra has issued a statement that indicates advanced discussions with respect to the possible purchase of the NYSE-listed Sparton Corporation. Given the nature of the established relationship with Sparton, together with Ultra management’s track record, we would expect the terms of any deal to limit execution risk.
Written by
Ultra Electronics |
Potential purchase of Sparton Corporation |
Potential M&A activity |
Aerospace & defence |
26 June 2017 |
Share price performance
Business description
Analysts
Ultra Electronics is a research client of Edison Investment Research Limited |
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Due to press speculation over the weekend, Ultra has issued a statement that indicates advanced discussions with respect to the possible purchase of the NYSE-listed Sparton Corporation. Given the nature of the established relationship with Sparton, together with Ultra management’s track record, we would expect the terms of any deal to limit execution risk.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
726.3 |
112.4 |
123.9 |
46.1 |
16.4 |
2.3 |
12/16 |
785.8 |
120.1 |
134.6 |
47.8 |
15.1 |
2.4 |
12/17e |
812.8 |
121.4 |
134.7 |
49.5 |
15.1 |
2.4 |
12/18e |
852.8 |
130.2 |
144.5 |
52.0 |
14.1 |
2.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Sparton is believed to have been in a sales process, and Ultra has been its joint venture partner in the US sonobuoy supplier ERAPSCO since 1987. Sparton was capitalised at $181m at Friday’s close of $18.34 per share and had net debt of $86m as of 2 April 2017. Ultra would finance any acquisition through its own facilities and an equity placing of up to 9.99%. Following acquisition, it would sell the lower-margin contract manufacturing activity (MDS) that accounts for two-thirds of Sparton’s revenues. As a result, Ultra would preserve the medium-term through cycle cash conversion target of 85% and the prudent net debt/EBITDA target ratio of below 1.5x.
Ultra would retain the Engineered Components & Products (ECP) segment, which in the year ended 3 July 2016 generated sales of $154.6m, with a gross margin of 29.3% and operating profits of $25.9m, a 16.7% margin. Over 60% of sales were from supplying sonobuoys to the US Navy. As at 2 April 2017, ECP’s backlog stood at $124m of which $112m was for sonobuoys. Under the existing five-year indefinite delivery indefinite quantity (IDIQ) contract that runs until 2019, in FY18 a further $160m of sonobuoy purchase contracts are expected to be placed by the US Navy. Sonobuoys are Ultra’s original core. Its leading technological expertise and experience, together with the longstanding joint venture, make a compelling case both for the acquisition and for governmental approval, in our view.
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Research: Healthcare
Paion announced positive top-line results from the confirmatory Phase III trial of remimazolam for procedural sedation in bronchoscopy, adding to the positive results of a Phase III colonoscopy trial. It is currently conducting additional Phase I studies to further assess abuse potential as the final step of its US clinical development program. Paion is on track to file for approval in both the US (in procedural sedation via partner Cosmo Pharmaceuticals) and Japan (for general anaesthesia) by mid-2018. With the successful completion of the Phase III program for procedural sedation we increase our valuation to €240m (vs €214m) or €4.13 per share.