The Investment Column: Ultra finds the right defence niche

On the face of it, Ultra should be having a hard time. To begin with, it's an engineer, with substantial dollar-denominated exports. Second, with a market capitalisation of just pounds 247m, it's a tiddler in the defence industry - a market where even a giant such as British Aerospace is deemed not to be large enough to survive on its own.

These factors have not stopped Ultra's share price from rising by over 50 per cent since the group joined the stock market 18 months ago. Judging by yesterday's full-year results, the rise is fully justified.

Ultra concentrates on niche products that the larger defence industry players cannot be bothered with. Its traditional strength is in sonobuoys, which are usually dropped into the sea from aircraft to help detect vessels like submarines. But it also supplies the landing gear computers for the Airbus and makes sophisticated equipment which cools the tips of heat- seeking missiles. Ultra spends roughly a quarter of its revenues on developing new products, but the beauty of the business is that most of that spending is funded by its customers.

Recently, Ultra has been concentrating on winning new orders. Its most recent coup was a pounds 32m contract to supply sonobuoys to the Ministry of Defence. That took its forward order book over pounds 250m, a substantial chunk of which will be realised this year. In the meantime, Ultra's share of work on the Nimrod reconnaissance aircraft has grown to pounds 56m.

Cashflow is strong, too. Despite spending pounds 4.8m on acquisitions last year Ultra added more than pounds 3m to its cash pile last year, taking its reserves to pounds 9m and leaving plenty of room for future deals. But with such a long-term, predictable business, Ultra is in no hurry to acquire.

Ultra's pre-tax profits rose to pounds 18.1m (pounds 14.1m) in 1997. Merrill Lynch forecasts profits of pounds 20.5m this year placing the shares, down 2p yesterday to 380p, on a forward multiple of 18. Not cheap but, in Ultra's case, fully justified.