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Research: Industrials
Cohort’s trading update ahead of its AGM and capital markets day continues to indicate the FY23 trading performance is ahead of the prior year. A continued strong level of order intake supported by UK MOD activity appears to be mitigating some ongoing supply chain delays, mainly affecting EID in Portugal. Our group FY23 estimates remain unchanged. For FY24 we now assume a lower tax rate which lifts our EPS estimate by c 7%. The resulting FY24 P/E of 12.6x looks increasingly undemanding with the lower UK tax assumption boosting our DCF value to 726p per share (from 684p previously).
Written by
Cohort |
Order book supports return to growth |
AGM statement and |
Aerospace and defence |
27 September 2022 |
Share price performance
Business description
Next events
Analyst
Cohort is a research client of Edison Investment Research Limited |
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Cohort’s trading update ahead of its AGM and capital markets day continues to indicate the FY23 trading performance is ahead of the prior year. A continued strong level of order intake supported by UK MOD activity appears to be mitigating some ongoing supply chain delays, mainly affecting EID in Portugal. Our group FY23 estimates remain unchanged. For FY24 we now assume a lower tax rate which lifts our EPS estimate by c 7%. The resulting FY24 P/E of 12.6x looks increasingly undemanding with the lower UK tax assumption boosting our DCF value to 726p per share (from 684p previously).
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
04/21 |
143.3 |
17.9 |
33.6 |
11.1 |
14.3 |
2.3 |
04/22 |
137.8 |
14.7 |
31.1 |
12.2 |
15.4 |
2.5 |
04/23e |
164.1 |
17.6 |
34.2 |
13.4 |
14.0 |
2.8 |
04/24e |
178.2 |
19.6 |
38.1 |
14.7 |
12.6 |
3.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Sailing through the headwinds
Strong order intake has continued with over £70m of new business won since the start of FY23 including the recent £34m SEA order from the Royal Navy, leaving the group order book at over £300m on 20 September 2022 with orders extending to 2030. Order cover for FY23 market consensus sales estimates now stand at 95%. Order activity for the UK MOD has been improving, with MCL in particular benefiting from the shorter lead times for its operational products. Like all companies, Cohort continues to face the post pandemic challenges to its supply chains, as well as inflationary pressures, but in the main appears to be managing these headwinds. The Portuguese subsidiary EID remains the outlier with its already depressed performance suffering further order delays.
Strengthening defence environment
Management is to spotlight the group’s strengthening maritime capabilities and prospects at a capital markets day presentation following the AGM. While no new material will be disclosed, we expect a positive outlook for that significant domain to be underscored. However, current hostilities have underlined the need for increased defence spending by NATO countries on operational equipment and support across all the defence and security domains (air, land, sea, cyber). We expect the overall environment for Cohort’s businesses to continue to improve, supporting sustainable profit and cash flow growth from FY24.
Valuation: Yet to reflect improving outlook
With earnings and cash flows set to benefit from the reduction in future UK corporation tax rates announced last week, Cohort’s rating looks increasingly undemanding. As it starts to deliver sustainable growth, we expect increasing recognition of its prospects to allow the rating to expand in what may be an increasingly challenged economic and stock market environment.
Earnings revisions
We have tweaked our divisional mix slightly to reflect a strengthening performance by MCL offsetting a weaker EID expectation. We expect those trends to continue into FY24 although we anticipate EID will start to recover as both domestic and export order activity starts to improve. Overall our revenue, EBITDA and pre-tax profit estimates remain unchanged in both FY23 and FY24. However, the reduction in UK corporation tax from April 2023 also provides a moderate boost to future earnings expectations, with our FY24 EPS estimate increasing by 6.9%.
Exhibit 1: Cohort earnings revisions
Year to April (£m) |
2023e |
2023e |
|
2024e |
2024e |
|
|
Prior |
New |
% change |
Prior |
New |
% change |
Revenues |
||||||
MASS |
44.5 |
44.5 |
0.0 |
46.8 |
46.8 |
0.0 |
SEA |
34.7 |
34.7 |
0.0 |
38.2 |
38.2 |
0.0 |
MCL |
24.1 |
25.7 |
4.5 |
26.1 |
26.1 |
4.5 |
EID |
11.9 |
10.8 |
(9.0) |
13.7 |
13.7 |
(8.4) |
Chess |
26.2 |
26.2 |
0.0 |
27.5 |
27.5 |
0.0 |
ELAC SONAR |
22.6 |
22.6 |
0.0 |
26.0 |
26.0 |
0.0 |
Intra group sales |
0.0 |
0.0 |
|
0.0 |
0.0 |
|
Total group |
164.1 |
164.1 |
0.0 |
178.2 |
178.2 |
0.0 |
|
|
|
|
|
|
|
EBITDA |
22.8 |
22.8 |
0.0 |
25.1 |
25.1 |
0.0 |
Adjusted operating profit |
|
|
|
|
|
|
MASS |
9.8 |
9.8 |
0.0 |
10.1 |
10.1 |
0.0 |
SEA |
4.3 |
4.3 |
0.0 |
4.6 |
4.6 |
0.0 |
MCL |
2.8 |
3.0 |
9.0 |
3.0 |
3.3 |
9.0 |
EID |
0.7 |
0.5 |
(34.8) |
1.5 |
1.2 |
(17.5) |
Chess |
2.6 |
2.6 |
0.0 |
3.0 |
3.0 |
0.0 |
ELAC SONAR |
2.7 |
2.7 |
0.0 |
3.1 |
3.1 |
0.0 |
HQ Other and intersegment |
(4.5) |
(4.5) |
0.0 |
(4.7) |
(4.7) |
0.0 |
Adjusted operating profit |
18.5 |
18.5 |
0.0 |
20.6 |
20.6 |
0.0 |
|
|
|
|
|
|
|
Adjusted PBT |
17.6 |
17.6 |
0.0 |
19.6 |
19.6 |
0.0 |
|
|
|
|
|
|
|
EPS - adjusted continuing (p) |
34.2 |
34.2 |
0.0 |
35.6 |
38.1 |
6.9 |
DPS (p) |
13.4 |
13.4 |
0.0 |
14.7 |
14.7 |
0.0 |
Adjusted net cash (excl. leases) |
7.5 |
5.0 |
(33.0) |
13.0 |
11.3 |
(12.9) |
Source: Edison Investment Research estimates
Lower future cash tax payments also boost our capped DCF valuation, which stands at 726p per share following these revisions. The sensitivity of our DCF model to WACC and terminal growth rates is shown in Exhibit 2 below.
Exhibit 2: Cohort capped DCF valuation sensitivity to WACC and terminal growth (p/share)
WACC |
6.0% |
6.5% |
7.0% |
7.2% |
7.5% |
8.0% |
8.5% |
9.0% |
9.5% |
10.0% |
Terminal growth rate |
||||||||||
0% |
888 |
811 |
744 |
726 |
687 |
637 |
593 |
554 |
519 |
488 |
1% |
895 |
817 |
750 |
731 |
693 |
642 |
598 |
558 |
523 |
491 |
2% |
903 |
824 |
756 |
737 |
698 |
647 |
602 |
562 |
527 |
495 |
3% |
910 |
830 |
762 |
743 |
703 |
652 |
607 |
567 |
531 |
499 |
Source: Edison Investment Research
Exhibit 3: 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) |
(2.9) |
||
Profit After Tax (norm) |
13.8 |
12.2 |
14.2 |
15.9 |
||
Profit After Tax (FRS 3) |
5.5 |
8.7 |
11.9 |
13.8 |
||
Average Number of Shares Outstanding (m) |
40.8 |
40.8 |
41.2 |
41.2 |
||
EPS - fully diluted (p) |
|
|
33.3 |
30.9 |
34.0 |
37.9 |
EPS - normalised (p) |
|
|
33.6 |
31.1 |
34.2 |
38.1 |
EPS - (IFRS) (p) |
|
|
13.4 |
22.5 |
28.7 |
33.0 |
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 |
134.6 |
148.0 |
Stocks |
12.9 |
22.8 |
26.3 |
27.9 |
||
Debtors |
66.0 |
56.2 |
65.6 |
71.3 |
||
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) |
(54.8) |
(54.5) |
Long term borrowings |
(29.8) |
(0.0) |
(35.4) |
(35.1) |
||
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 |
103.3 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
21.1 |
22.9 |
8.1 |
21.1 |
Net Interest |
(0.8) |
(0.9) |
(0.9) |
(1.0) |
||
Tax |
(4.1) |
(2.5) |
(3.3) |
(3.7) |
||
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 |
(6.0) |
6.3 |
||
Opening net debt/(cash) |
|
|
4.7 |
(2.5) |
(11.0) |
(5.0) |
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) |
(5.0) |
(11.3) |
||
Net debt/(cash) (including leases) |
|
|
5.1 |
(0.9) |
5.1 |
(1.2) |
Source: Company reports, Edison Investment Research estimates
|
|
Research: Real Estate
With pandemic restrictions lifted and the return to work underway, Regional REIT’s (RGL) H122 results show good and continuing operational progress. The sharp rise in energy prices affected property costs, but this should moderate with government support measures. Combined with income seasonality and fully fixed/hedged borrowing costs, RGL expects a stronger H222 performance and reiterated its full-year DPS target of 6.6p.