Some hedge funds suffered losses on Wednesday after shares in defence components supplier Ultra Electronics surged following better than expected results.
The company’s shares rose 11 per cent after it returned to underlying growth last year, wrongfooting some hedge funds that had shorted the stock. Shorting is a bet that the share price will fall.
Ultra is the UK’s second-most shorted stock, according to data from UK regulator the Financial Conduct Authority.
Although it is not known which funds’ positions have crystallised losses, those that have bet on the stock falling include George Soros’s SFM UK Management, Thunderbird Partners, Naya Capital Management and Ako Capital.
The FTSE 250 company’s share price tumbled by a quarter in 2018 because of fears about its performance. The company supplies components and systems for markets including aerospace, defence, energy and transport.
Although shares were boosted by the company’s first increase in organic sales since 2011 and a promise by new chief executive Simon Pryce to shake up the group, they are still down almost 20 per cent from highs last July.
“There has been some short interest knocking around and some people were concerned about the state of the business,” Mr Pryce said. “I have listened to those concerns and assured them they are unfounded.”
Short selling involves borrowing the stock of a company and selling it in the market, in the hope of buying it back later at a lower price. The short-seller can then pocket the difference, minus the costs of borrowing.
Ultra posted a 2.2 per cent rise in revenues to £766.7m on an organic basis, which strips out the effect of currency movements and any acquisitions or disposals. It also exceeded its own guidance range on cash conversion, which came in at 79 per cent.
While pre-tax profit fell by 30 per cent to £42.6m, the company said that earnings were “as anticipated”.
“Ultra has exited 2018 with good momentum,” said analysts at Investec. “There is no kitchen sinking, as some investors feared.”
Analysts revised their forecasts for 2019 after the results on Wednesday, increasing revenue forecasts and reducing net debt.
Investor confidence appeared to be bolstered by Mr Pryce’s commitments to overhaul Ultra after eight months in his new role. He said the company had strong businesses which were diffuse and in need of streamlining.
“We want to focus on the areas where we can add value and I’m pretty sure that’s not the 145 capabilities we have at the moment,” he told the Financial Times.
Mr Pryce said he would consider selling units which were not bringing substantial value, though there were no plans to do so immediately.
He also outlined plans to increase spending on R&D to 4-5 per cent of revenues in 2019, from 3.7 per cent in 2018, as well as to increase IT spending.
“We had an encouraging 2018 and these businesses are not in as bad shape as people thought they were,” he said. “For me, after eight months, I’m jolly glad I’m here and I think we have an exciting year ahead.”
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