UK defence suppliers shrug off spending cut worries

UK defence suppliers shrug off spending cut worries

Both companies' shares up, outperforming sector.

August 2, 2010 3:36 by Reuters

As Britain’s defence sector braces itself for government cuts, engineers such as Senior and Ultra Electronics say they can weather tighter spending as they focus on non-military sectors.

Senior and Ultra both released higher pretax profits on Monday, boosted in part by stronger sales in areas unrelated to military spending such as civil aircraft.

Senior, which also makes parts for planes and exhaust connectors for cars, said healthier commercial airplane sales at Boeing and Airbus and cost cutting helped boost profits.

“The main driver is solidity in the aerospace division and much improved margins and the cost base (was) reduced last year,” Chief Executive Mark Rollins told Reuters in a phone interview.

Ultra Electronics, which has a market value of 1.1 billion pounds ($1.74 billion), said it was focused on providing products to meet demand for cyber security software and markets outside of Europe and the United States, such as Australia and the Middle East.

“It’s a very tense region and I think that there’s lots of things going on, there’s lots of terrorism activities,” Ultra Chief Executive Douglas Caster said.

Both companies said they would be eyeing acquisitions in the coming year. Rollins said Senior’s improved debt position meant the company was looking forward to returning to growth.

Ultra’s Caster said acquistions of 50 to 70 million pounds in size would be ideal for the company.

CYBER WARS

Ultra wants to cash in on stronger demand for cyber warfare systems such as encryption software. Last month the company signed a 76 million pound contract with Britain’s Ministry of Defence (MOD) to provide cryptographic equipment.

“Where governments are trying to protect their information is the sorts of cryptographic methods we’re supplying … there’s a very significant role that we have and there are other areas that we are prospecting,” Caster said.

Both the Pentagon and MOD want to reduce defence spending to cope with ballooning national deficits, but spending on flagship military aircraft is not expected to decrease significantly.

“We’re not too concerned in the near term. We’re fortunate to be on the right programmes,” Senior’s Rollins said, adding that the build rates of the Black Hawk helicopter and Lockheed Martin’s C-130 transport aircraft would not go down.

The weakest area for Senior was Flexonics, which accounts for 40 percent of the group’s business and supplies components for cars and trucks such as exhaust connectors.

Rollins said he was confident the market would pick up.

Shares in Senior were up 4.3 percent to 133 pence a share at 1040 GMT, the biggest gainer on the FTSE 350 Aerospace and Defence index.

Ultra’s stock also rose, by 0.9 percent to 1,629 pence.

Analysts at Investec placed its forecast under review for Ultra’s shares pending its meeting with the company, but said it expected a small increase in its full-year results forecast.

“We view Ultra as one of the highest quality companies in our universe with niche technologies and a strategy capable of sustaining growth through the cycle and an increasingly difficult outlook for defence,” Investec said in a note. (Reporting by Golnar Motevalli; Editing by Michael Shields)