Orders underpinning prospects

Cohort 29 April 2019 Update
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Cohort

Orders underpinning prospects

Record order performance

Aerospace & defence

29 April 2019

Price

373p

Market cap

£153m

Net cash (£m) at 31 October 2018

4.7

Shares in issue

41.0m

Free float

100%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.7

(3.9)

7.2

Rel (local)

(2.8)

(11.4)

7.5

52-week high/low

422p

345p

Business description

Cohort is an AIM-listed defence and security company. Including the recent addition of Chess Technologies, it operates across five divisions: MASS (34% of FY18 sales); SEA (34%); MCL (16%); and the 80%-owned Portuguese business EID (17%).

Next events

FY19 results

2 July 2019

Analyst

Andy Chambers

+44 (0)20 3681 2525

Cohort is a research client of Edison Investment Research Limited

As anticipated at the H119 results, order intake for Cohort remained strong through the second half of the year. With the addition of Chess, the backlog at the year end should stand at more than £175m, comfortably a record for the group. It represents c 1.3 years of revenues based on our FY20 expectations and while many of the contracts are multi-year, it does provide increased sales cover for the medium term. Cohort continues to deliver against its growth strategy, appears to be largely insulated from Brexit concerns and still trades on an undemanding P/E multiple.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/17

112.7

14.5

27.9

7.1

13.4

1.9

04/18**

111.0

15.2

29.5

8.2

12.6

2.2

04/19e

125.9

16.3

32.3

9.2

11.5

2.5

04/20e

150.8

18.9

36.1

10.1

10.3

2.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items, and tax credits of 1.30p in FY17 and 0.59p in FY18. **FY18 restated for IFRS 15 adoption from start of FY19.

Record order book underpins outlook

The record order intake in FY19 of over £150m, combined with the addition of the Chess Technologies order book, is expected to swell Cohort’s year-end backlog to at least £175m. The backlog compares with £102.2m at the end of FY18, and £108.8m at the half year, and represents around 1.4 years of sales based on our FY19 estimate, although delivery will be spread over at least five years. With Chess likely to add around £25m of unfilled orders, the backlog for the ongoing activities is expected to have risen by around 50% thanks to several major multi-year awards and renewals. Following £32.8m of orders secured in November the backlog rose to £135.4m. Of this, £50.3m was due for delivery in H219, providing order cover for FY19 sales at that time of 81%. Subsequent order intake further improved the FY19 sales cover to 85%, as well as providing support for the medium term.

Chess adds US presence

One of the most strategically significant contracts signed recently was the announcement by Chess in late March of a sub contract for the US DOD to supply electro optical (EO) tracking and control systems to Liteye, the prime contractor for a highly mobile containerised counter unmanned air systems (C-UAS) solution. Although small at in excess of £3m, it verifies the positioning of Chess’s anti UAV defence systems (AUDS) technology in the US market following previous operational successes with the US military. The technology was recently featured in BBC’s Panorama programme about the Gatwick drone incident. It also serves as a bridgehead for Cohort’s other product offerings and activities into the major US defence and security market, which could provide a new driver for future growth.

Valuation: Rating does not reflect progress

Despite the encouraging developments during H219, Cohort is trading on a P/E multiple for FY20 (ie 12 months forward) close to single digits. The rating looks anomalous given the consistent execution of its strategy compared to many peers.

Order successes verify strategy

Cohort continues to successfully execute on its strategy to deliver both organic and acquisition driven growth, with robust financial discipline and controls. It exploits the agility and innovation of smaller, more entrepreneurial business models while providing the stability of a larger company with shared capabilities and extended market access, supported by a strong financial position.

The continued success in achieving contract renewals, combined with new business opportunities, would appear to verify the relevance of Cohort’s capabilities and know-how to its customer base. Many of the renewals are for longstanding contracts where Cohort has established credentials as the incumbent, enabling it to maintain its tenure. The expertise of the divisions in their own fields attracts new business opportunities both domestically in the UK (and Portugal for EID), as well as in export markets, as can be seen from the success in EWOS (electronic warfare operational support) markets and land and sea communications.

The addition of Chess Technologies with its strong military and export orientation (in FY18, 66% of sales were to overseas customers including 8% to the US) should provide the opportunity to take Cohort’s overall offering to a wider audience.

The initial consideration of £20.1m for 81.84% of Chess is expected to leave Cohort with a net debt position at the year end, which at the half year was estimated to be around £16m. With further potential payments of up to £21.8m over the next two financial years, we expect the focus for FY20 will be on organic development. As a reminder, the split of Chess’s revenues is shown below.

Exhibit 1: Chess Technologies revenues split by product type (FY18 £18.2m)

Exhibit 2: Chess Technologies revenues split by customer location (FY18 £18.2m)

Source: Cohort

Source: Cohort

Exhibit 1: Chess Technologies revenues split by product type (FY18 £18.2m)

Source: Cohort

Exhibit 2: Chess Technologies revenues split by customer location (FY18 £18.2m)

Source: Cohort

Contract awards in H219

In November, the following major contract awards were announced and these were included in the backlog calculation for 30 November 2018 of £135.4m.

Exhibit 3: Major order announcements in November 2018

Date

Division

Value £m

Customer

Term

Activity

13 November

EID

9.6

Export

2 years

Vehicle intercoms

13 November

MASS

3.4

UK MOD

1.5 years

Business analysis support

20 November

SEA

5.4

Royal Navy

5 years

Maritime equipment support (follow on)

21 November

MASS

20.0

Export

7 years

EWOS software and services

Total

38.4

Source: Company announcements

We note that at the half year results the company indicated an order intake of £32.8m in November 2018 and we think this discrepancy with the figure shown in Exhibit 4 could reflect a delay between award and confirmation.

The contracts announced in H219 primarily reflect the conversion of three preferred bidder status prospects noted at the half year. We suspect there are a number of unidentified contracts that may have been signed without announcement during the period which could further boost the year-end backlog.

Exhibit 4: Major order announcements since 1 December 2018

Date

Division

Value (£m)

Customer

Term

Nature

26 December 2018

MASS

3.2

Thailand

3 years

EWOS software solutions & support

12 February 2019

MCL

15.1

UK MOD

5 years

Electronic Systems

14 February 2019

MASS

>50.0

UK MOD

8 years

Strategic support

Total

>68.3

Source: Company announcements

On 27 March 2019 Chess was awarded a subcontract worth in excess of £3m for the US DOD to supply its AUDS technology to be integrated into a highly mobile containerised C-UAS solution.

Development of expected year-end backlog

For the ongoing businesses (ie excluding Chess), of the £135.4m backlog at the end of November 2018, £50.3m was deliverable in the remainder of the financial year, taking total sales and orders on hand for delivery in FY19 at that time to £96.0m. Management indicated that of the preferred bidder status contracts outstanding at that point, some £7m of additional revenues would be delivered in H219. These have all now been awarded with an aggregate value in excess of £68.3m, leaving a further £14.9m of sales to be booked and shipped for H219 to reach our estimated revenues for the ongoing business of £117.9m for FY19, less than was required in H218.

Exhibit 5: Cohort order backlog development

Ongoing activities

£m

Backlog at 30 November 2018

135.4

Of which traded in H219

-50.3

Order intake from preferred bidder status

68.3

Of which traded in H219 estimate

(7.0)

Other identifiable contracts

5.4

Of which traded in H219 estimate

(0.5)

Ongoing activities estimated backlog at 30 April 2019

151.3

Chess Technologies estimated backlog at 30 April 2019

25.0

Estimated Cohort backlog at 30 April 2019

176.3

Ongoing activities

Backlog at 30 November 2018

Of which traded in H219

Order intake from preferred bidder status

Of which traded in H219 estimate

Other identifiable contracts

Of which traded in H219 estimate

Ongoing activities estimated backlog at 30 April 2019

Chess Technologies estimated backlog at 30 April 2019

Estimated Cohort backlog at 30 April 2019

£m

135.4

-50.3

68.3

(7.0)

5.4

(0.5)

151.3

25.0

176.3

Source: Company announcements, Edison Investment Research

Conclusion

As is normal for Cohort, its core business has cycles of major multi-year orders being renewed and then progressively traded from backlog. Further significant renewals are expected in FY20. The fact that intake and backlog are at record levels suggests that underlying growth is real with new business complementing the renewals. In addition, it should be remembered that the record performance is being achieved at a time when SEA’s submarine activity is at a relatively low ebb, with major orders not expected until FY21. We believe investors should be encouraged by the underlying progress and that Chess Technologies will enhance growth prospects further. The current rating does not appear to reflect this.


Exhibit 6: Financial summary

£m

2017

2018

2019e

2020e

Year end 30 April

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

112.7

111.0

125.9

150.8

Cost of Sales

(73.7)

(72.4)

(82.1)

(98.4)

Gross Profit

39.0

38.6

43.8

52.4

EBITDA

 

 

15.7

16.4

17.8

21.1

Operating Profit (before amort. and except.)

14.5

15.2

16.6

19.6

Intangible Amortisation

(11.3)

(5.3)

(11.7)

(7.3)

Exceptionals

(2.3)

(0.3)

(1.6)

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

1.0

9.6

3.3

12.3

Net Interest

0.0

(0.1)

(0.3)

(0.7)

Profit Before Tax (norm)

 

 

14.5

15.2

16.3

18.9

Profit Before Tax (FRS 3)

 

 

1.0

9.5

3.0

11.6

Tax

1.1

(1.4)

(0.5)

(1.9)

Profit After Tax (norm)

12.8

12.7

13.7

15.8

Profit After Tax (FRS 3)

2.1

8.1

2.5

9.8

Average Number of Shares Outstanding (m)

40.4

40.7

40.7

40.7

EPS - fully diluted (p)

 

 

27.6

29.2

32.0

35.7

EPS - normalised (p)

 

 

27.9

29.5

32.3

36.1

EPS - (IFRS) (p)

 

 

9.1

19.4

5.4

21.5

Dividend per share (p)

7.1

8.2

9.2

10.1

Gross Margin (%)

34.6

34.8

34.8

34.8

EBITDA Margin (%)

13.9

14.7

14.2

14.0

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

12.9

13.7

13.2

13.0

BALANCE SHEET

Fixed Assets

 

 

60.6

54.9

85.1

77.1

Intangible Assets

50.6

45.3

66.7

59.4

Tangible Assets

9.9

9.6

18.4

17.8

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

56.3

60.8

47.0

56.7

Stocks

5.3

7.3

10.3

11.5

Debtors

37.8

32.5

32.7

39.2

Cash

12.0

20.5

3.5

5.5

Other

1.2

0.5

0.5

0.5

Current Liabilities

 

 

(39.7)

(38.9)

(21.2)

(25.1)

Creditors

(36.1)

(29.7)

(21.2)

(25.1)

Short term borrowings

(3.5)

(9.2)

0.0

0.0

Long Term Liabilities

 

 

(3.2)

(1.9)

(42.0)

(34.0)

Long term borrowings

(0.0)

0.0

(19.5)

(12.0)

Other long term liabilities

(3.2)

(1.9)

(22.6)

(22.1)

Net Assets

 

 

74.0

74.9

68.9

74.6

CASH FLOW

Operating Cash Flow

 

 

2.4

15.7

4.1

18.0

Net Interest

0.0

(0.1)

(0.3)

(0.7)

Tax

(1.7)

(2.4)

(2.6)

(3.2)

Capex

(0.9)

(0.7)

(1.8)

(0.8)

Acquisitions/disposals

(9.1)

0.0

(23.3)

0.0

Financing

0.5

(0.8)

0.0

0.0

Dividends

(2.5)

(3.0)

(3.4)

(3.9)

Other

0.0

(6.0)

0.0

0.0

Net Cash Flow

(11.4)

2.6

(27.3)

9.5

Opening net debt/(cash)

 

 

(19.8)

(8.5)

(11.3)

16.0

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.2

0.0

0.0

Closing net debt/(cash)

 

 

(8.5)

(11.3)

16.0

6.5

Source: Company reports, Edison Investment Research.
Note: Restated for IFRS15 from 2018, EPS includes historic one-off tax credits.

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 Edison analyst 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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.

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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

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 Edison analyst 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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 Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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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