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Defence prioritisation to strengthen demand

Cohort 1 August 2022 Update
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Cohort

Defence prioritisation to strengthen demand

FY22 results

Aerospace and defence

1 August 2022

Price

550p

Market cap

£227m

Adjusted net cash (£m) at 31 April 2022
(excludes £10.1m lease liabilities)

11.0

Shares in issue

41.1m

Free float

72%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

13.3

1.1

(5.0)

Rel (local)

10.9

3.0

(6.2)

52-week high/low

630p

449.5p

Business description

Cohort is an AIM-listed defence and security company operating across six divisions: MASS (28% of FY22 sales), SEA (22%), MCL (16%), the 80%-owned Portuguese business EID (6%), the 81%-owned Chess Dynamics based in the UK (12%) and ELAC SONAR in Germany (16%).

Next events

AGM

27 September 2022

H123 results

December 2022

Analysts

Andy Chambers

+44 (0)20 3681 2525

Cohort is a research client of Edison Investment Research Limited

Cohort’s position as a growing international defence company is being increasingly recognised as the sector gains relevance for governments and investors alike. The Russian invasion of Ukraine is stimulating short-term operational requirements but, more importantly, has initiated a return to higher long-term defence spending commitments from NATO members. Cohort’s positioning in the training and supply of critical capabilities to its customers should benefit from the enhanced environment. FY22 was challenging for EID and Chess, but the rest of the business developed positively and prospects for a return to growth this year are good. Despite the recent share price gains, these prospects are not reflected in the rating, and our updated discounted cash flow (DCF) value of 684p/share indicates significant potential.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/21

143.3

17.9

33.6

11.1

16.4

2.0

04/22

137.8

14.7

31.1

12.2

17.7

2.2

04/23e

164.1

17.6

34.2

13.4

16.1

2.4

04/24e

178.2

19.6

35.6

14.7

15.4

2.7

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

Orders underpin FY23 outlook

The FY22 results were in line with the headlines announced in the May trading update. The greater detail in the preliminary announcement increases our confidence that Cohort is returning to growth in FY23. With £127.7m of the record £291.0m closing order backlog due for delivery in FY23, order cover of our sales estimate is 78% compared to 64% in FY22, and increased to 90% in July. Encouragingly, the more problematic areas of EID and Chess are expected to improve, with MASS, SEA and MCL progressing further and ELAC consolidating after a strong first full year contribution.

Defence a necessity not a luxury

The recent increase in geopolitical tensions has alerted politicians and the public to the need to ensure adequate defence capability, which should result in increased investment in readiness and equipment levels. These are areas where Cohort’s portfolio of key services, support and products are well-positioned, both within Europe and for broader export markets, where activity has started to recover after the pandemic disruptions and constraints. Combined with the lengthening of the order book, the strong balance sheet and recently announced extended bank facilities, Cohort is well-positioned to resume growth.

Valuation: Improving prospects not fully discounted

While the shares have performed well in the last couple of months, the FY24 P/E of 14.9x remains undemanding given the improving defence market backdrop. Our capped DCF now returns a value of 684p up from 678p in May, an indication that potential remains as Cohort’s operations deliver sustainable, cash generative earnings growth.

FY22 ends with positive momentum

Cohort delivered against FY22 expectations that were revised down at H122 and momentum has appeared to improve as the year came to a close. The bulk of the business performed well, with MASS, SEA, MCL and ELAC all ahead. Cohort responded to the anticipated weakness at EID, due to lower domestic orders in Portugal, and issues at Chess as project execution, contract delays and other issues impaired profitability. In addition, inflationary headwinds increased as the year progressed. The rest of the business made good progress, and as pandemic constraints eased and geopolitical tensions rose, the operational environment for defence companies improved. Most significantly, order intake remained strong and a record order backlog now underpins 90% of FY23 market consensus sales. With operational requirements gathering pace due to the Russian aggression in Ukraine, Cohort should grow strongly in FY23 and management are targeting double-digit growth in the medium term.

The key features of the FY22 results are summarised below:

Exhibit 1: Cohort FY22 results summary

Year to April (£m)

FY21

FY22

% change

Revenues

MASS

39.5

38.4

(3%)

SEA

28.0

31.0

11%

MCL

18.0

21.7

21%

EID

21.0

8.2

(61%)

Chess

28.6

16.9

(41%)

ELAC

8.3

21.5

160%

Group total revenues

143.3

137.8

(4%)

Adjusted operating profit

MASS

8.7

9.1

5%

SEA

2.4

3.4

44%

MCL

2.1

2.3

9%

EID

4.8

0.9

(82%)

Chess

3.0

0.3

(90%)

ELAC

1.2

3.8

221%

Unallocated central costs

(3.6)

(4.2)

17%

Group total adjusted operating profit

18.6

15.5

(17%)

Profit before tax

7.1

10.2

45%

Adjusted profit before tax

17.9

14.7

(18%)

Adjusted EPS

33.6

31.1

(8%)

DPS

11.1

12.2

+10%

Source: Cohort reports

The company reported a record closing order book of £291.0m (FY21: £242.4m) that reflected strong order intake of £186.4m (FY20: £180.3m), representing an FY22 book to bill of 1.35x (FY21: 1.26x). Order cover at FY22 was 78% (FY21: 64%) of FY23 of market consensus sales estimates of c €164m. Once again, the current year has started strongly with FY23 order cover reaching 90% in July.

Revenues fell 4% to £137.8m (FY21: £143.3m), broadly in line with our revised expectations in May. The primary cause of the year-on-year shortfall was Chess, where a mutual agreement was reached with a customer to terminate a contract during the year, reversing £6m of revenue that had been recognised previously on the project. The system has been sold for delivery to a new customer in FY23. Together with the already anticipated decline at EID, the 3% growth for the ongoing activities was delivered despite continued constraints caused by the pandemic, especially on international trade.

Adjusted operating profit fell 17% to £15.5m (FY21: £18.6m), with an aggregate £6.6m contribution decline from Chess and EID more than offsetting a £4.2m increased contribution from the other divisions (pre central costs). The profit impact of the contract termination at Chess was minimal, with the margin performance caused by technical delays and issues with legacy products.

Adjusted EPS fell 8% to 31.1p (FY21: 33.6p).

The DPS was 12.2p (FY21: 11.1p), once again a 10% increase in line with the group’s progressive dividend policy and continuing the positive track record since flotation in 2006.

Year-end adjusted net cash (excluding £10.2m lease liabilities) was again better than expected at £11.0m (FY21: £2.5m). With an increase in planned capex and higher working capital to support growth, management expects net cash balances should decrease in FY23 but remain positive.

Defence and security revenues accounted for 92% (FY21: 94%) of the group total in FY22, reflecting the drop of EID and Chess revenues, which more than offset the full year contribution from ELAC against five months in FY21. Non-defence sales grew by £1.9m to £11.2m. The defence and security sales can be split further by customer and market segment as shown in Exhibits 2 and Exhibit 3, respectively. Overall, group revenues were split 60:40 between products and the provision of services.

Exhibit 2: Cohort’s FY22 defence and security revenue (£126.6m) by market segment, % of group sales

Exhibit 3: Cohort’s FY22 defence and security revenue (£126.6m) by end customer, % of group sales

Source: Cohort reports

Source: Cohort reports

Exhibit 2: Cohort’s FY22 defence and security revenue (£126.6m) by market segment, % of group sales

Source: Cohort reports

Exhibit 3: Cohort’s FY22 defence and security revenue (£126.6m) by end customer, % of group sales

Source: Cohort reports

Board change

Cohort has also announced that its co-founder and largest shareholder (22.1%), Stanley Carter, is not seeking re-election to the board as a non-executive director (NED) at the forthcoming AGM. He formed the group with chairman Nick Prest in 2006 and was its first CEO before becoming co-chairman in 2009. He stepped down to his current NED role in 2015. Cohort has entered into a shareholder agreement with Carter, and he is expected to remain a supportive shareholder.

Divisional summaries

MASS

MASS provides training, electronic warfare and cyber security services to predominantly government customers. It operates through four divisions: EWOS (Electronic Warfare Operational Support), Digital Services, Strategic Systems and Training Support.

While MASS’s sales fell 3% in FY22 to £38.4m (FY21: £39.5m) it improved adjusted operating profit to £9.1m (FY21: £8.7m) with a record margin of 23.7% achieved due to favourable revenue mix, cost savings in delivering some longer-term contracts and flat overheads. It continued to face pandemic constraints in the early part of the year, but these moderated as the year progressed. The Training Support operations and export-oriented EWOS business were particularly affected, with some activity slipping into the current year. Its UK MOD revenues increased modestly, but this was more than offset by a shortfall in export revenues. The division generated a strong operational cashflow of £9.9m as outstanding invoices were collected during the year. That is not expected to recur in FY23.

Despite improved order intake of £34.1m (FY21: £25.6m) the book to bill ratio was negative and the order backlog declined to £72.8m as the operations continued to deliver against long-term contracts. With £26.8m deliverable in FY23 providing a lower than usual level of sales cover of 61%, management expects MASS to show only modest growth in the current year.

Chess

Chess Dynamics is an innovative, well-respected surveillance, tracking and gunfire control specialist for military and commercial customers.

As previously indicated, during the year there was a sharp drop in revenues and profitability at Chess. Revenues fell 41% to £16.9m (FY21: £28.6m). Over half the fall was caused by a mutually terminated contract that led to a reversal of £6m of already booked revenues in FY22. The system involved has subsequently been sold which, together with a robust order backlog, provides complete cover for FY23 sales expectations. Weaker margins on some projects due to delays, customer deployment changes and technical challenges continued, along with legacy project issues that the now established new management team has been working hard to correct. As a result, the adjusted operating profit fell to just £0.3m (FY21: £3.0m).

Order intake was a healthy £15.2m (FY21: £57.7m) net of the cancelled order, primarily for European land forces, including some extensions to existing contracts. It also included £4m of spares and repairs. The backlog of £40.7m (FY21: £42.3m) contained £22.0m for delivery in FY23.

Cohort is confident of a return to growth in the coming year as problem project issues are resolved by the strengthened management team and expects a performance close to FY21 levels.

SEA

SEA delivers a broad range of systems, products and services into the defence and transport markets. It operates through three divisions: Complex Systems, Maritime Solutions and Transport Management. In Maritime it provides combat systems requirements to UK and export customers including communications and ship and fleet protection such as torpedo launching systems (TLS). It also supplies anti-submarine warfare systems, including towed array sonars, infrastructure and training. It carries out technology research on behalf of the UK MOD into future maritime and soldier systems. Transport delivers automated traffic enforcement systems in the UK and United States.

SEA’s continuing activities grew revenues by 12% in FY22 to £31.0m (FY21: £27.0m) as a result of weaker transport and research sales, and despite the subsea business contributing £1m in FY21 up to its divestment in August 2020. Submarine system revenues stepped down again in FY22 as Australia shifted to a nuclear-powered option and cancelled the existing contract for a diesel-powered boat. SEA is optimistic that it should win the external communication system (ECS) when the programme is relaunched. Adjusted operating profit grew 44% £3.4m (FY21: £2.4m).

Order intake was strong at £36.8m but a repeat of the exceptional levels seen in FY21 of over £63m was not expected. Cohort is positive about prospects for further export and Royal Navy support contracts in FY23. Orders secured in FY22 included ECS and other systems work for the UK submarine fleet, including initial orders for the new Dreadnought class. The submarine segment should now start to grow. Export orders included TLS for the Philippines Navy and an initial ECS for a Royal New Zealand Navy frigate. SEA also acquired the 50% of the JSK activity in Canada that it did not already own, positioning it to secure and support business with the Canadian Navy including TLS for the new frigate programme. Order intake was also robust for the Transport business, ROADflow, where revenues returned to pre-pandemic levels. The backlog of £75.1m (FY21: £69.3m) is now the largest in the group, with £27m due for delivery in FY23 underpinning some 80% of sales expectations.

Management expects SEA to grow further in the coming year and adjusted operating margins to approach 12%.

EID

EID is Cohort’s subsidiary in Portugal, 20% owned by the Portuguese government, with capabilities in the increasingly important areas of tactical and naval command, control and communications (C3). It supplies domestically to naval and military customers as well as to a wide range of export customers including 145 naval vessels worldwide.

As previously indicated well in advance, EID sales declined sharply in FY22 following the completion of a large intercom systems export contract in FY21 and in the face of very low domestic activity. Sales more than halved to £8.2m (FY21: £21.0m). Sales to the Portuguese Ministry of National Defence fell to £3.9m (FY21: £5.9m) and export sales on which EID relies dropped to £4.2m (FY21 £14.9m). Adjusted operating profit was £0.9m (FY21: £4.8m) largely due to operational gearing, a margin of 11.1% (FY21: 23.1%) well below the historic range.

Order intake improved to £11.4m (FY21: £4.2m) following the award of a long-delayed order by the Portuguese Army. The order backlog improved to £23.1m (FY20: £20.0m). It provides order cover for its expected sales with £11.3m of the order book deliverable in FY23. While there are some good prospects, including a significant naval order for the Portuguese Navy that EID expects to secure in FY23, it still awaits a pickup in the important export markets, which could be helped by the increased global focus on up-to-date and secure defence capabilities.

Management expects EID to improve its performance in FY23 but to be short of levels achieved historically and we continue to take a cautious view.

MCL

Marlborough Communications Limited (MCL) is a leading supplier of advanced electronic communications, information systems and signals intelligence technology to the defence and security sectors. Its primary customer is the UK MOD, which accounts for more than 90% of revenues.

In FY22 MCL continued to recover from the challenges faced in FY20, delivering further revenue growth of 21% to £21.7m (FY21: £18.0m). Adjusted operating profit rose slightly to £2.2m (FY21: £2.1m) with margins falling slightly to 10.4% (FY21: 11.5%) due to a higher level of systems deliveries in FY21.

The order book grew substantially to £22.5m (FY21: £12.4m) in FY22 following very strong order intake of £31.8m (FY21: £21.8m). Orders secured included over £15m for hearing protection systems as well as close to £7m of additional work on autonomous vehicles. Management continues to try to secure larger and longer-term support opportunities for the Royal Navy that would improve visibility for MCL. It has the shortest order cycle of Cohort’s businesses with typical lead times of three to six months. However, it also tends to be at the forefront of the pace of defence operations and as such has seen positive momentum in its order pipeline in the last few months.

With £20.4m of the backlog due for delivery in FY23 providing order cover of its sales expectations of 80%, management expects MCL to grow further in the coming year.

ELAC

ELAC serves global naval customers including navies, system integrators and shipyards. It supplies hydroacoustic sensors for underwater surveillance, object avoidance and ranging including submarine and surface ship sonar suites, submarine rescue sonars, digital underwater communications and echo-sounders for manned and unmanned platforms.

ELAC made a stronger first full year contribution in FY22 than management expected compared to just five months in FY21, following its acquisition for a net consideration of £1.3m in November 2021. FY22 revenues were £21.5m (FY21: £8.3m) and contributed £3.8m (FY21: £1.2m) to adjusted operating profit at a margin of 17.5%. The margin benefited from £1.1m of cost recovery from Wärtsilä relating to an order that has yet to be finalised, with the underlying margin being 12.4%. A further £0.5m should be received from the arrangement in FY23 before it ends and hopefully the contract for submarine sonar systems is secured. Order intake of £57.1m benefited from securing a £43m contract for two Italian submarines from Leonardo, which provides long-term underpinning of its sonar activity, with options for two more boats. ELAC also secured new, upgrade and spares orders for its market-leading underwater communication systems. It also more than doubled the order backlog to £56.8m (FY21: £21.2m), with current year sales cover of 90%.

FY23 is expected to be a year of consolidation in the early stages of the Italian contract and with the lower cost recovery from the Wärtsilä agreement. Management expects performance to be in line with FY22.

Exhibit 4: Cohort divisional analysis and updated Edison estimates

Year to April (£m)

2019

2020

2021

2022

2023E

2024E

MASS

38.9

41.1

39.5

38.4

44.5

46.8

SEA

38.3

31.7

28.0

31.0

34.7

38.2

MCL

21.7

15.1

18.0

21.7

24.1

26.1

EID

11.5

18.0

21.0

8.2

11.9

13.7

Chess

10.7

25.2

28.6

16.9

26.2

27.5

ELAC

8.3

21.5

22.6

26.0

Group revenues

121.2

131.1

143.3

137.8

164.1

178.2

MASS

8.2

8.9

8.7

9.1

9.8

10.3

SEA

5.5

3.5

2.4

3.4

4.3

4.8

MCL

2.3

1.7

2.1

2.3

3.0

3.3

EID

1.4

3.1

4.8

0.9

0.7

1.6

Chess

1.7

3.9

3.0

0.3

2.6

3.0

ELAC

1.2

3.8

2.7

3.1

Unallocated central costs*

(2.8)

(2.9)

(3.6)

(4.2)

(4.5)

(4.7)

Adjusted operating profit

16.2

18.2

18.6

15.5

18.7

21.4

MASS

21.0%

21.7%

22.1%

23.8%

22.0%

22.0%

SEA

14.3%

11.1%

8.4%

10.9%

12.5%

12.5%

MCL

10.5%

11.0%

11.5%

10.4%

12.5%

12.5%

EID

11.8%

17.2%

23.1%

10.5%

6.0%

12.0%

Chess

15.8%

15.6%

10.5%

1.9%

10.0%

11.0%

ELAC

14.1%

17.5%

12.0%

12.0%

Adjusted operating profit margin

13.3%

13.9%

13.0%

11.3%

11.4%

12.0%

Source: Company reports, Edison Investment Research estimates. *HQ Other and intersegment.

Outlook for FY23

Exhibit 5: Cohort divisional order intake and backlog

Year to April (£m)

FY18

FY19

FY20

FY21

FY22

FY22/FY21
% change

Order intake

MASS

29.1

97.0

33.5

25.6

34.1

33

SEA

27.0

36.7

34.7

63.7

36.8

(42)

MCL

12.1

26.0

9.1

21.8

31.8

46

EID

8.4

18.9

29.3

4.3

11.4

165

Chess

11.3

17.8

57.7

15.2

(74)

ELAC

7.2

57.1

693

Total order intake

76.6

189.9

124.4

180.3

186.4

3.4

Order book

MASS

40.9

98.8

91.2

77.2

72.8

(6)

SEA

33.6

31.1

33.6

69.3

75.1

8

MCL

10.3

14.6

8.6

12.4

22.5

82

EID

19.0

25.6

36.5

20.0

23.1

16

Chess

20.8

13.4

42.3

40.7

(4)

ELAC

21.2

56.8

168

Total order book

103.8

190.9

183.3

242.4

291.0

20

Source: Cohort reports, Edison Investment Research estimates

The year-end order book of £291.0m (FY21: £242.4m) was once again a new record level for the year end with much of the increase driven by ELAC, which secured an order worth more than £40m for the development and delivery of sonar for two new Italian submarines. ELAC’s strong order performance compensated for more normal levels of intake at Chess and SEA, which both achieved significant export order levels in FY21. MCL also secured its best level of orders since joining the group, which included more than £15m of hearing protection orders and £7m of extensions to its work on autonomous vehicles for the British Army. Its products are most closely corelated to the increase in operational activity resulting from the war in Ukraine, with momentum building towards the year end. As a result of these factors, FY22 order intake of £186.4m was up 3.4%, representing a book to bill ratio for the group of 1.35x (FY21: 1.26x).

Of the FY22 year-end backlog, £127.7m (FY21: £99.7m) is expected to be delivered in FY23, providing 78% cover for consensus sales expectation of c £164m, substantially better than the previous year level of 64% and a record level. The subsequent increase in cover levels to 90% (July 2021: 70%) suggests that risk to revenue estimates may be to the upside due to low levels of infill orders required and the more favourable current defence environment.

Exhibit 6: Cohort year end order backlog run off by division

MASS

EID

SEA

Chess

MCL

ELAC

Total

At 30 April 2021

72.8

23.1

75.1

40.7

22.5

56.8

291.0

H1 2022/23

14.1

5.5

16.5

14.8

8.9

9.0

68.8

H2 2022/23

12.7

5.8

10.8

7.2

11.5

10.9

58.9

FY23

26.8

11.3

27.3

22.0

20.4

19.9

127.7

FY24

18.2

5.0

12.3

7.0

1.0

15.1

58.6

FY25

13.1

2.9

7.8

3.1

1.1

8.3

36.3

Later years

14.7

3.9

27.7

8.6

0.0

13.5

68.4

Source: Cohort

Investing for growth

Cohort continues to invest in organic growth in line with its agile growth strategy. Discussions over a new facility in Kiel are expected to lead to a c.£15m investment programme over the next few years. In addition, spending on new product development continues to grow with research and development (R&D) investment in FY22 of £11.3m (FY21: £9.5m) including close to £3.0m (FY22: £3.6m) that was self-funded. The current divisional focus on projects is:

SEA – FILS weapon system development, autonomous platform communications architecture, ROADflow.

EID – Integrated Soldier Systems development, next generation ICCS.

MASS – expanding training support offering.

Chess – novel sensor and control technology, deep learning for target detection and classification, low size, weight and power EO sensor systems for UGVs.

ELAC – further development of Sphere incorporating hull and flank mounted arrays.

It also continues to target value-enhancing merger and acquisitions opportunities both in the UK and overseas.

Debt and liquidity

Adjusted net cash of £11.0m (excluding leases liabilities) was again better than expected, largely due to delayed capital expenditure, deferral of the Chess minority buy-out and the favourable timing of receipts. These factors are expected to unwind in FY23. As a result, management expects net cash balances to be reduced in FY23, after the £1.4m buy-out of the Chess minority that is now expected in H123. Lease liabilities rose marginally to £10.1m (FY21: £7.6m).

Since the start of FY23, Cohort has renewed and extended its banking facility. The new facility is for three years to July 2025 with options to extend it to July 2027. The £35m revolving credit facility has been agreed on broadly similar terms to the previous facility (which was due to expire in November 2022), and there is an option (accordion) to draw a further £15m. The facility has been extended from two to three banks.

Cohort’s strong financial position and the cash generative nature of the operations allows management to maintain a robust capital allocation policy. Organic investment and self-funded R&D spending remain key, while supporting the progressive dividend policy. The robust balance sheet also provides resources to pursue strategic value-adding acquisitions.

Revisions to estimates and updated valuation

Exhibit 7: Cohort revisions to earnings estimates

Year to April (£m)

2022E

2022

 

2023E

2023E

 

2024E

 

Prior

Actual

% change

Prior

New

% change

New

Revenue

MASS

38.8

38.4

(0.9)%

43.4

44.5

2.6%

46.8

SEA

30.2

31.0

2.6%

33.8

34.7

2.6%

38.2

MCL

21.2

21.7

2.5%

23.6

24.1

2.5%

26.1

EID

8.4

8.2

(1.9)%

10.1

11.9

18.5%

13.7

Chess

18.0

16.9

(6.3)%

26.5

26.2

(1.2)%

27.5

ELAC SONAR

22.4

21.5

(3.9)%

26.9

22.6

(15.9)%

26.0

Intra group sales

-0.1

0.0

 

0.0

0.0

 

0.0

Total Group

138.9

137.8

(0.8)%

164.2

164.1

(0.1)%

178.2

 

 

 

 

 

 

 

EBITDA

18.3

19.4

5.9%

21.9

22.8

4.2%

25.1

Adjusted operating profit

 

 

 

 

 

 

 

MASS

8.9

9.1

2.5%

9.6

9.8

2.6%

10.1

SEA

3.8

3.4

(10.3)%

4.2

4.3

2.6%

4.6

MCL

2.8

2.3

(18.2)%

2.9

2.8

(5.7)%

3.0

EID

0.3

0.9

156.5%

0.6

0.7

18.5%

1.5

Chess

0.9

0.3

(65.2)%

2.7

2.6

(1.2)%

3.0

ELAC SONAR

3.0

3.8

26.6%

3.2

2.7

(15.9)%

3.1

HQ Other and intersegment

(4.2)

(4.2)

(0.1)%

(4.5)

(4.5)

0.0%

(4.7)

Adjusted operating profit

15.5

15.5

0.4%

18.7

18.5

(1.3)%

20.6

Adjusted PBT

14.6

14.7

0.6%

17.8

17.6

(1.2)%

19.6

EPS - adjusted continuing (p)

30.1

31.1

3.4%

34.7

34.2

(1.4)%

35.6

DPS (p)

12.2

12.2

0.0%

13.4

13.4

0.0%

14.7

Net cash / (debt)

10.6

11.0

3.7%

5.1

7.5

47.9%

13.0

Source: Edison Investment Research estimates

Overall, our estimates for FY23 are broadly unchanged, although there are some divisional mix changes. EID is starting to recover ahead of our prior expectations, while ELAC faces a year of consolidation ahead of delivery on some major contracts. Operations are generally returning to normal as travel restrictions are diminishing and client engagement is improving, which is reopening export opportunities. The evolving defence environment should remain supportive as allocated spending increases and the Ukraine conflict generates additional requirements. However, as we noted in our previous note, some customer resources may be diverted by shifting short-term priorities, with some services work being necessarily deferred.

We also introduce our FY24 estimate. We expect continued growth of revenues to £178m, an adjusted profit before tax estimate of £19.6m, and our adjusted EPS estimate is 35.6p. We now forecast end April 2024 adjusted net cash of £13.0m. Management guidance is for growth to accelerate in FY24 based on current orders for long-term delivery and the pipeline of opportunities.

In the longer term, management is targeting double-digit growth.

Our capped DCF valuation now stands at a value of 684p compared to 678p per share previously. The increase reflects the combination of higher starting net funds, higher investment levels reducing near term cashflows and a calculated weighted average cost of capital (WACC) of 7.2%. The sensitivity of our capped DCF model to WACC and terminal growth rate is shown below.

Exhibit 8: Cohort capped DCF sensitivity to WACC and terminal growth (p per share)

WACC

6.0%

6.5%

7.0%

7.2%

7.5%

8.0%

8.5%

9.0%

Terminal growth rate

0%

840

767

704

684

650

603

561

524

1%

847

773

710

690

655

607

565

528

2%

854

779

716

695

660

612

570

532

3%

861

786

721

701

665

617

574

536

Source: Edison Investment Research estimates

Exhibit 9: Financial summary

£m

2021

2022

2023e

2024e

Year end 30 April

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

143.3

137.8

164.1

178.2

Cost of Sales

(90.0)

(81.2)

(96.7)

(105.0)

Gross Profit

53.4

56.6

67.4

73.2

EBITDA

 

 

22.1

19.4

22.8

25.1

Operating Profit (before amort. and except.)

18.6

15.5

18.5

20.6

Intangible Amortisation

(10.1)

(6.9)

(3.1)

(2.9)

Exceptionals

(0.7)

2.4

0.0

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

7.8

11.1

15.4

17.7

Net Interest

(0.8)

(0.9)

(0.9)

(1.0)

Profit Before Tax (norm)

 

 

17.9

14.7

17.6

19.6

Profit Before Tax (FRS 3)

 

 

7.1

10.2

14.5

16.7

Tax

(1.6)

(1.5)

(2.5)

(3.9)

Profit After Tax (norm)

13.8

12.2

14.2

14.9

Profit After Tax (FRS 3)

5.5

8.7

11.9

12.8

Average Number of Shares Outstanding (m)

40.8

40.8

41.2

41.2

EPS - fully diluted (p)

 

 

33.3

30.9

34.0

35.4

EPS - normalised (p)

 

 

33.6

31.1

34.2

35.6

EPS - (IFRS) (p)

 

 

13.4

22.5

28.7

30.5

Dividend per share (p)

11.1

12.2

13.4

14.7

Gross Margin (%)

37.2

41.1

41.1

41.1

EBITDA Margin (%)

15.4

14.1

13.9

14.1

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

13.0

11.3

11.2

11.6

BALANCE SHEET

Fixed Assets

 

 

78.4

81.7

80.7

79.4

Intangible Assets

58.8

59.8

57.9

55.0

Tangible Assets

12.5

12.3

13.2

14.8

Right of Use assets

7.1

9.6

9.6

9.6

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

112.5

121.5

132.1

145.3

Stocks

12.9

22.8

25.4

27.1

Debtors

66.0

56.2

64.0

69.5

Cash

32.3

40.4

40.4

46.4

Other

1.4

2.2

2.3

2.4

Current Liabilities

 

 

(56.6)

(94.5)

(64.8)

(69.6)

Creditors

(56.6)

(65.1)

(64.8)

(69.6)

Short term borrowings

(0.1)

(29.4)

0.0

0.0

Long term Liabilities

 

 

(49.2)

(19.5)

(52.4)

(52.9)

Long term borrowings

(29.8)

(0.0)

(32.9)

(33.4)

Lease liabilities

(7.6)

(10.1)

(10.1)

(10.1)

Other long term liabilities

(11.9)

(9.3)

(9.3)

(9.3)

Net Assets

 

 

85.1

89.2

95.6

102.3

CASH FLOW

Operating Cash Flow

 

 

21.1

22.9

10.6

21.3

Net Interest

(0.8)

(0.9)

(0.9)

(1.0)

Tax

(4.1)

(2.5)

(3.3)

(4.7)

Capex

(1.2)

(2.0)

(3.3)

(4.5)

Acquisitions/disposals

(3.3)

(2.3)

(1.4)

0.0

Financing

(0.3)

(2.1)

0.0

0.0

Dividends

(4.2)

(4.7)

(5.2)

(5.7)

Other

0.0

0.0

0.0

0.0

Net Cash Flow

7.2

8.5

(3.5)

5.5

Opening net debt/(cash)

 

 

4.7

(2.5)

(11.0)

(7.5)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

(0.0)

0.0

0.0

0.0

Closing net debt/(cash) (excluding leases)

(2.5)

(11.0)

(7.5)

(13.0)

Total financial liabilities

 

 

5.1

(0.9)

2.7

(2.8)

Source: Company reports, Edison Investment Research estimates


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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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United Kingdom

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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

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This report has been commissioned by Cohort and prepared and issued by Edison, in consideration of a fee payable by Cohort. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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