Ultra Electronics — Strengthening defence

Ultra Electronics — Strengthening defence

Ultra Electronics has more than delivered on our earnings expectations in FY16, with anticipated flat organic performance boosted by M&A and FX in the second half. The outlook is for slightly improved organic growth in FY17 marginally offset by dilution from the ID disposal. With net debt down significantly we would also expect increased M&A to augment the improving defence spending environment, which should accelerate in FY18. Having rolled the base forward a year, our fair value for now stands at 2,257p.

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Written by

Ultra Electronics

Strengthening defence

FY16 results

Aerospace & defence

6 March 2017

Price

1,982p

Market cap

£1,397m

US$1.23/£

Net debt (£m) at 31 December 2017

256.7

Shares in issue

70.5m

Free float

99%

Code

ULE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.5

(1.9)

11.2

Rel (local)

2.9

(10.3)

(6.6)

52-week high/low

2,030p

1,595p

Business description

Ultra Electronics is a global aerospace and defence electronics company, with operations across three divisions: Aerospace & Infrastructure (26% of 2016 sales); Communications & Security (33%); and Maritime & Land (41%).

Next events

AGM & trading update

28 April 2017

Pre-close update

June 2017

Interim results

7 August 2017

Analysts

Andy Chambers

+44 (0)20 3681 2525

Alexandra West

+44 (0)20 3077 5700

Ultra Electronics is a research client of Edison Investment Research Limited

Ultra Electronics has more than delivered on our earnings expectations in FY16, with anticipated flat organic performance boosted by M&A and FX in the second half. The outlook is for slightly improved organic growth in FY17 marginally offset by dilution from the ID disposal. With net debt down significantly we would also expect increased M&A to augment the improving defence spending environment, which should accelerate in FY18. Having rolled the base forward a year, our fair value for now stands at 2,257p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

726.3

112.4

123.9

46.1

16.0

2.3

12/16

785.8

120.1

134.6

47.8

14.7

2.4

12/17e

812.8

121.4

134.7

49.5

14.7

2.5

12/18e

852.8

130.2

144.5

52.0

13.7

2.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Continuing to execute as expected

In what was a more normal year in 2016, in stark contrast to some of its UK defence peers, Ultra’s performance exceeded our expectations at the earning level. Sales did fail to meet the flat organic growth guidance due to delays on the award of a few export contracts, which deferred revenue recognition. Nevertheless, a broadly flat organic performance was diluted by the disposal of ID after eight months. The upside came from the better than expected integration of Herley, which achieved synergies ahead of its business case by $1.5m, as well as more favourable FX. The balance of the performance came from strong execution across the group, notably as deliveries on some major sonobuoy contracts concluded in Maritime & Land.

Balance sheet supports strategy

The company delivered better than expected operating cash flow in FY16, achieving cash conversion of 92%, the best since 2011. Ultra continues to invest for growth with £34.1m (4.3% of sales) spent on new capabilities, £5m on M&A and substantial customer funding. Proceeds of £22m from disposals helped to reduce the year end net debt to £256.7m, despite adverse FX. The cash flow also supported a dividend increase of 3.7%, slightly ahead of our expectations, but with an increased level of earnings cover.

Valuation: Accelerating growth in 2018

We have rolled our sum of the parts and DCF based valuation forward by one year. We calculate our estimated fair value based on a simple average of these two measures, which currently returns a value of 2,257p (previously 2,037p). The shares have performed well since our Outlook note in September, and are further supported by the prospect of accelerating global defence spending in 2018.

FY16 results boosted by FX

The results for 2016 have been delivered slightly ahead of expectations at the profit levels. The more promising outlook for defence spending has gained momentum in recent months and provides a supportive framework for prospects. Commercial aerospace prospects are also good with a number of contracts expected to transition into production in 2017. In addition, Ultra continues to invest for growth, with over 19% of sales spent in 2016 on pursuing both organic and M&A opportunities, including customer funding.

In fact the order book rose 6% to £799.3m following a stronger year of order intake of £778.3m, up 22% on the prior year. On an underlying basis allowing for FX and acquisitions, the order intake was up 10.4%. Order cover for 2017 is said to be at usual levels.

Sales rose by 8.2% to £785.8m (FY15 £726.3m). Organic sales growth of -4.1% was slightly below guidance; this is attributed to delays in signing some export contracts, including the India torpedo defence contract. The completion of the End Cryptographic Unit Replacement Programme (ECU RP) also weighed on sales. FX contributed 7.5% to sales growth and full year contributions from 2015 acquisitions, predominantly Herley and Furnace Parts, added 5.8%. Disposals diluted the performance by 1%.

Underlying operating profit improved 9.3% with a strong bounce back from Maritime & Land, and good growth in Aerospace & Infrastructure more than compensating for a flat performance in Communications & Security, which was affected by the disposal of ID as well as the ECU RP contract. As FX and acquisitions contributed 10.6% to the overall improvement, the organic improvement was only 0.2% allowing for the ID disposal dilution of 1.5%.

The S3 shared service programme remains on track, with the UK Global Business Service (GBS) centre in operation, and a second planned for the US. Ultra charged £6.5m against the programme in 2016, up from £4.9m in 2015. The programme remains a key part of driving internal efficiencies.

Having benefited from the anticipated ID disposal proceeds, year end net debt stood at £256.7m. This was nevertheless lower than both the market and our own expectations by some distance, representing a much better operational performance.

Defence spending growth resumes

Ultra expects global defence spending to rise by around 3% in 2017, arresting several years of decline. We would expect this to accelerate further in 2018 given the pressures to increase spending in Europe combined with the increased defence budget the Trump administration is proposing in the US. Spending always lags budgets by 18 months to two years, and a Continuing Resolution (CR) remains in place in the US for the time being, deferring spending towards H217. Assuming a coordinated Republican approach in Congress even a CR might be avoided next year, and the threat of sequestration might be lifted.

The general macro picture remains more uncertain, with changes likely in the way the world does business following the changes in the US and the decision in the UK to leave the EU. With only 7% of sales generated by exports from the UK to Europe, Brexit should not be major concern for Ultra.

In Aerospace (17% of group sales), commercial aircraft programme ramp ups are gaining pace, placing pressure on the supply chain to perform but supported by continued growth in air travel. Military aircraft prospects for Ultra remain dominated by the F-35, where increased production rates continue. Communications (15% of sales) market growth is expected to be maintained at a healthy rate, with military communications expected to grow 7% per annum, and the prognosis for C2ISR (21% of sales) markets also remains very positive, driven by geopolitical tensions. With improving prospects for both the Underwater Warfare and Maritime segments, which represent 32% of sales, the overall picture for Ultra looks encouraging.

Exhibit 1: Ultra Electronics summary financial estimates revisions

Year to December (£m)

 

2016e

2016

% change 

2017e

2017e

% change 

Prior

Actual

Prior

New

Aerospace & Infrastructure

219.1

204.7

-6.6%

230.0

212.9

-7.5%

Maritime & Land

310.5

322.1

3.7%

319.8

331.9

3.8%

Communications & Security

267.7

259.0

-3.2%

271.5

268.0

-1.3%

Sales

797.3

785.8

-1.4%

821.4

812.8

-1.1%

 

 

 

 

 

 

EBITDA

146.0

148.0

1.4%

150.0

149.8

-0.1%

 

 

 

 

 

 

Aerospace & Infrastructure

33.5

32.4

-3.4%

35.2

33.0

-6.2%

Maritime & Land

54.3

59.1

8.7%

56.0

58.4

4.4%

Communications & Security

42.8

39.7

-7.3%

43.4

41.5

-4.4%

Underlying EBITA

130.7

131.1

0.3%

134.6

132.9

-1.2%

 

 

 

 

 

 

Underlying PBT

117.1

120.1

2.5%

121.8

121.4

-0.3%

 

 

 

 

 

 

EPS – underlying continuing (p)

128.3

134.6

5.0%

133.5

134.7

0.9%

DPS (p)

47.6

47.8

0.4%

49.5

49.5

0.0%

Net debt/(cash)

284.2

256.7

-9.7%

236.5

228.5

-3.4%

Source: Ultra Electronics reports, Edison Investment Research estimates

We have modestly reduced our sales expectations for the current year, although we expect a marginal improvement in pre-tax profit and EPS in FY17.

Valuation

We have moved our sum of the parts valuation to an FY18 basis, and rolled our DCF forward following the year end. Our capped DCF currently returns a value of 2,061p (2,026p previously). The optimism in defence markets has continued to drive defence ratings higher in recent months and we have rolled our sum-of-the-parts (SOTP) methodology forward to a 2018 basis. Our previous basis returned a value of 2,048p, and the shares have been approaching that level. Our FY18 SOTP-based fair value is 2,452p, as shown in Exhibit 2 below. The improvement reflects the acceleration of profitability expected next year aided by a lower tax charge, as well as a sharp re-rating of the communications peers as defence growth prospects have improved. We calculate our estimated fair value of the company based on a simple average of these two measures, which currently returns a value of 2,257p (previously 2,037p)

Exhibit 2: Edison sum-of-the-parts valuation (FY18 basis)

 

2018e EBITA (£m)

Tax rate (%)

2018e NOPAT (£m)

P/E
(x)

Value (£m)

Basis

Aerospace & Infrastructure

34.9

22.0

27.2

17.4

473

US peers (Raytheon, Rockwell Collins) + premium to Thales & BAE – Civil Aviation

Maritime & Land

60.7

22.0

47.4

16.9

801

20% premium to UK sector (15.5x) – Pivot to Pacific opportunity

Communications & Security

44.6

22.0

34.8

20.3

706

Premium rating to US peers (Rockwell Collins, L-3 Communications), enhanced commercial exposure

Enterprise value

1,980

Net cash/(debt)

(257)

December 2016 net debt

Equity value

1,723

Shares in issue (m)

70

Implied fair value per share (p)

 

 

 

 

2,452

 

Source: Bloomberg and Edison Investment Research estimates

Exhibit 3: Financial summary

£m

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

713.7

726.3

785.8

812.8

852.8

Cost of Sales

(494.3)

(514.1)

(580.9)

(609.9)

(640.4)

Gross Profit

219.4

212.2

204.9

202.8

212.3

EBITDA

 

 

132.3

134.8

148.0

149.8

157.2

Operating Profit (before amort. and except.)

 

 

118.1

120.0

131.1

132.9

140.2

Intangible Amortisation

(3.4)

(3.8)

(5.4)

(5.1)

(4.9)

Exceptionals

(97.8)

(81.7)

(71.5)

(44.4)

(39.0)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

16.8

34.5

54.2

83.5

96.4

Net Interest

(6.0)

(7.5)

(11.1)

(11.5)

(10.0)

Profit Before Tax (norm)

 

 

112.0

112.4

120.1

121.4

130.2

Profit Before Tax (FRS 3)

 

 

10.8

27.0

43.1

71.9

86.3

Tax

(15.0)

(9.8)

(9.4)

(17.0)

(20.1)

Profit After Tax (norm)

86.0

86.8

94.7

94.7

101.6

Profit After Tax (FRS 3)

(4.2)

17.2

33.8

55.0

66.3

Average Number of Shares Outstanding (m)

69.9

70.1

70.3

70.3

70.3

EPS - normalised (p)

 

 

123.1

123.9

134.6

134.7

144.5

EPS - normalised and fully diluted (p)

 

 

122.8

123.8

134.5

134.6

144.3

EPS - (IFRS) (p)

 

 

14.5

24.5

48.0

78.2

94.3

Dividend per share (p)

44.3

46.1

47.8

49.5

52.0

Gross Margin (%)

30.7

29.2

26.1

25.0

24.9

EBITDA Margin (%)

18.5

18.6

18.8

18.4

18.4

Operating Margin (before GW and except.) (%)

16.5

16.5

16.7

16.4

16.4

BALANCE SHEET

Fixed Assets

 

 

532.1

637.2

655.4

626.5

601.7

Intangible Assets

461.5

569.0

589.2

555.8

526.1

Tangible Assets

62.6

68.2

66.2

70.7

75.6

Investments

8.1

0.0

0.0

0.0

0.0

Current Assets

 

 

250.6

308.5

364.9

392.3

407.9

Stocks

73.7

81.8

78.2

83.3

90.0

Debtors

101.5

117.0

142.5

162.6

169.7

Cash

41.3

45.5

74.6

74.6

74.6

Other

34.1

64.2

69.6

71.9

73.5

Current Liabilities

 

 

(199.8)

(181.4)

(178.6)

(178.3)

(186.4)

Creditors

(199.8)

(181.4)

(178.6)

(178.3)

(186.4)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(279.6)

(447.5)

(478.1)

(451.7)

(399.7)

Long term borrowings

(170.8)

(341.0)

(331.3)

(303.1)

(249.3)

Other long term liabilities

(108.8)

(106.5)

(146.8)

(148.6)

(150.5)

Net Assets

 

 

303.4

316.8

363.6

388.9

423.5

CASH FLOW

Operating Cash Flow

 

 

97.8

85.4

117.8

109.0

140.6

Net Interest

(4.5)

(6.0)

(7.5)

(11.1)

(11.5)

Tax

(22.9)

(26.0)

(17.3)

(17.0)

(20.1)

Capex

(17.7)

(6.4)

(7.4)

(19.0)

(19.8)

Acquisitions/disposals

(104.5)

(171.8)

16.8

0.0

0.0

Financing

2.2

4.9

3.0

0.0

0.0

Dividends

(29.7)

(31.3)

(32.6)

(33.8)

(35.3)

Other

(5.6)

(13.9)

(34.0)

0.0

0.0

Net Cash Flow

(84.9)

(165.2)

38.9

28.2

53.9

Opening net debt/(cash)

 

 

42.2

129.5

295.6

256.7

228.5

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(2.5)

(0.9)

0.0

0.0

(0.0)

Closing net debt/(cash)

 

 

129.5

295.6

256.7

228.5

174.6

Source: Ultra Electronics report, Edison Investment Research estimates

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Ultra Electronics and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Ultra Electronics and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

RedHill BioPharma — Transformation to commercial/R&D spec pharma

RedHill’s Q416 results update showed steady progress with R&D activities and the company readying itself for commercialisation in the US, following the recently announced co-promotion deal for Donnatal. Data readouts from three mid- to late-stage clinical trials will shape RedHill’s H117, providing inflection points for the share price. Our valuation is slightly lowered to NIS1.3bn ($369m) on somewhat higher than expected guided cash burn in 2017.

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