Earnings growth despite COVID impacts

Cohort 21 May 2020 Update
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Cohort

Earnings growth despite COVID impacts

FY20 trading update

Aerospace & defence

21 May 2020

Price

545p

Market cap

£223m

Net debt (£m) at 30 April 2020

5

Shares in issue

41.0m

Free float

72%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.8

(19.7)

36.3

Rel (local)

4.4

(0.1)

63.6

52-week high/low

729p

400p

Business description

Cohort is an AIM-listed defence and security company operating across five divisions: MASS (32% of FY19 sales), SEA (32%), MCL (18%), the 80%-owned Portuguese business EID (9%), and the 81%-owned Chess Technologies based in the UK (c five months 9%).

Next events

FY20 results

July 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Cohort is a research client of Edison Investment Research Limited

Cohort has released a year-end trading update that reflects the impact of COVID-19 on its activities in the final two months of FY20, usually the busiest period for the group. As a result, management has provided guidance that has led us to reduce our sales and profits estimates by 9% for FY20, with a lower tax charge limiting the impact on EPS to just over 2%. Cohort’s best current guidance is for FY21 performance to be in line with FY20. The resultant P/E ratio of 15.4x for FY21, the current year, allows for no enhancement from the expected acquisition of ELAC Nautik in the summer. In our view, the rating remains undemanding.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/18

110.5

15.1

29.1

8.2

18.7

1.5

04/19

121.2

15.9

33.6

9.1

16.2

1.7

04/20e

132.9

16.8

34.9

10.1

15.6

1.9

04/21e

138.0

17.6

35.3

11.1

15.4

2.0

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

COVID-19 response implemented

As COVID-19 disruption took hold, management sought to protect its employees by applying work from home practices for over 70% of staff and furloughing a few of the most vulnerable. Of the rest still on site, many are working from home when possible. Health and safety protocols have been implemented at manufacturing sites, which all remain operational. In addition, management has a clear focus on cash and cost control. Cohort is still seeking to complete the ELAC Nautik acquisition in June as originally intended, but the deal may face some delay due to COVID-19 disruption. The balance sheet remains healthy with liquidity headroom of £25m extended by the conversion of a £10m accordion facility to a committed one.

Disruption to usually busy final quarter

Until the last two months of the year, trading had tracking in line with management expectations, but Q4 is normally the busiest trading period. The impact of lockdowns in the UK and Portugal has led to the deferral of some orders, in part due to restricted travel, as well as delays to the delivery of some services and products, which has continued into FY21. The order backlog remains high at £186m and covers 60% of reduced FY21 revenue expectations. The pipeline of opportunities also remains. As a result of the disruption, we have lowered our FY20 revenues and operating profit by c 9% and FY21 by c 11%.

Valuation: ELAC potential not reflected in rating

At the EPS level, we expect a lower tax charge to limit our FY20 EPS estimate reduction to around 2.2%, with EPS of around 35p now anticipated in both FY20 and FY21. The P/E ratio for FY21 of 15.4x is before the enhancement expected to be achieved once the ELAC acquisition has completed. Despite the disruption caused by COVID-19, Cohort’s rating still appears undemanding.

Earnings revisions

Cohort has released a year-end trading update that reflects the impact of COVID-19 on its activities in the final two months of the year. Management now expects the key highlights of the FY20 performance to be:

Revenue of c £133m (2019: £121.2m).

Adjusted operating profit of c £18m (2019: £16.2m).

FY20 adjusted EPS of c 35.0p (2019: 33.6p).

Net debt at 30 April 2020 of c £5m (30 April 2019: net debt £6.4m).

A closing order book of c £186m (30 April 2019: £190.9m).

Management also indicated that it expects FY21 trading performance to be in line with FY20, although it is difficult to predict as it depends on the impact of COVID-19.

We have adjusted our forecasts last updated following the H120 results in December 2019 to reflect the current trading update. Our estimates are revised down as shown in Exhibit 1 below.

Exhibit 1: Cohort earnings estimates revisions

Year to April (£m)

2020e

2020e

 

2021e

2021e

 

 

Prior

New

% change

Prior

New

% change

MASS

43.4

38.2

(12.1)

46.5

39.7

(14.6)

SEA

38.5

32.6

(15.4)

40.4

33.2

(17.8)

MCL

22.1

19.3

(12.7)

23.3

19.9

(14.4)

EID

19.6

17.9

(8.8)

20.2

18.4

(8.8)

Chess

22.0

25.0

13.6

23.5

26.8

13.6

Total group sales

145.7

132.9

(8.8)

153.9

138.0

(10.3)

 

 

 

 

 

 

EBITDA

22.0

20.1

(8.7)

23.3

20.8

(10.6)

 

 

 

 

 

 

MASS

8.5

7.4

(12.1)

9.1

7.7

(14.6)

SEA

5.4

4.5

(15.4)

5.6

4.6

(17.8)

MCL

2.1

1.9

(12.7)

2.2

1.9

(14.4)

EID

3.5

3.2

(8.8)

3.6

3.3

(8.8)

Chess

3.2

3.6

 

3.3

3.7

 

HQ Other and intersegment

(3.0)

(2.8)

(6.7)

(3.0)

(2.8)

(6.7)

Adjusted operating profit

19.7

17.9

(9.1)

20.8

18.5

(11.1)

 

 

 

 

 

 

Adjusted PBT

18.6

16.8

(9.5)

19.9

17.6

(11.5)

 

 

 

 

 

 

EPS - adjusted continuing (p)

35.7

34.9

(2.2)

39.2

35.3

(9.8)

DPS (p)

10.1

10.1

0.0

11.1

11.1

0.0

Net cash / (debt)

(6.8)

(5.3)

(21.5)

5.0

(5.0)

nm

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2018

2019e

2020e

2021e

Year end 30 April

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

110.5

121.2

132.9

138.0

Cost of Sales

(70.9)

(78.1)

(85.7)

(89.0)

Gross Profit

39.7

43.0

47.2

49.0

EBITDA

 

 

16.3

17.3

20.1

20.8

Operating Profit (before amort. and except.)

15.2

16.2

17.9

18.5

Intangible Amortisation

(5.3)

(9.5)

(8.0)

(7.5)

Exceptionals

0.3

(0.7)

0.0

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

10.3

5.9

9.9

11.0

Net Interest

(0.1)

(0.3)

(1.0)

(0.9)

Profit Before Tax (norm)

 

 

15.1

15.9

16.8

17.6

Profit Before Tax (FRS 3)

 

 

10.2

5.7

8.8

10.1

Tax

(2.1)

(0.6)

(0.4)

(1.8)

Profit After Tax (norm)

12.2

13.3

15.1

15.0

Profit After Tax (FRS 3)

8.1

5.1

8.5

8.3

Average Number of Shares Outstanding (m)

40.7

40.7

40.8

40.8

EPS - fully diluted (p)

 

 

28.7

33.4

34.7

35.1

EPS - normalised (p)

 

 

29.1

33.6

34.9

35.3

EPS - (IFRS) (p)

 

 

19.0

13.4

19.0

19.2

Dividend per share (p)

8.2

9.1

10.1

11.1

Gross Margin (%)

35.9

35.5

35.5

35.5

EBITDA Margin (%)

14.8

14.3

15.1

15.1

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

13.8

13.3

13.4

13.4

BALANCE SHEET

Fixed Assets

 

 

54.9

72.9

65.0

57.5

Intangible Assets

45.3

61.9

54.0

46.4

Tangible Assets

9.6

11.0

11.0

11.1

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

61.5

75.6

82.4

91.6

Stocks

5.9

13.5

16.1

17.5

Debtors

34.7

42.7

46.8

49.7

Cash

20.5

18.8

18.8

23.8

Other

0.5

0.6

0.7

0.7

Current Liabilities

 

 

(39.6)

(36.2)

(35.8)

(34.6)

Creditors

(30.4)

(36.1)

(35.8)

(34.6)

Short term borrowings

(9.2)

(0.1)

0.0

0.0

Long Term Liabilities

 

 

(1.9)

(35.3)

(30.2)

(29.4)

Long term borrowings

0.0

(25.1)

(24.1)

(28.8)

Other long term liabilities

(1.9)

(10.1)

(6.1)

(0.6)

Net Assets

 

 

75.0

77.0

81.3

85.1

CASH FLOW

Operating Cash Flow

 

 

16.2

11.5

9.0

15.0

Net Interest

(0.1)

(0.3)

(1.0)

(0.9)

Tax

(2.9)

(2.6)

(1.7)

(2.6)

Capex

(0.7)

(2.1)

(1.3)

(1.4)

Acquisitions/disposals

(6.0)

(21.0)

0.0

(5.5)

Financing

(0.8)

0.1

0.0

0.0

Dividends

(3.0)

(3.5)

(3.8)

(4.3)

Other

0.0

0.0

0.0

0.0

Net Cash Flow

2.6

(17.8)

1.1

0.3

Opening net debt/(cash)

 

 

(8.5)

(11.3)

6.4

5.3

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.2

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(11.3)

6.4

5.3

5.0

Source: Company data, Edison Investment Research


General disclaimer and copyright

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 £49,500 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 2020 Edison Investment Research Limited (Edison).

Australia

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

1,185 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

1,185 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

General disclaimer and copyright

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 £49,500 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 2020 Edison Investment Research Limited (Edison).

Australia

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

1,185 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

1,185 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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