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Berenberg upgrades Ultra Electronics, says downside now limited
Berenberg upped Ultra Electronics to 'hold' from 'sell' on Friday, lifting the price target to 1,440p from 1,300p.
It said Ultra has weathered a difficult few months following the profit warning last November, the departure of the chief executive and termination of the planned acquisition of US-based Sparton.
However, the market has now digested these developments and priced in Ultra's inherent risks, as evidenced by the selloff of around 25% in the share price since October, Berenberg argued.
"In our view, the sell case has largely played out, and based on improving fundamentals we now view downside risk as limited."
Berenberg said it's increasingly confident that expectations have been reset to a realistic level, which in its forecasts translates to 1% organic growth and trough earnings in 2018. Thereafter, it expects low organic growth, supported by recent order activity, current programme positions and an improved budget outlook in the core US defence market, with the earnings profile enhanced by a £134m buyback.
The risks that remain include UK defence budget uncertainty, a US Department of Justice sonobuoy antitrust review and ongoing litigation relating to the cancelled Oman IT services contract.
"We expect the shares to tread water until we receive certainty (either positive or negative) on these risks, with a potential update at the Q1 trading statement (date tbc)," Berenberg said.
At 1425 BST, the shares were up 6% to 1,426p.