Cohort — Progressing to plan

Cohort (AIM: CHRT)

Last close As at 28/03/2024

440.00

11.00 (2.56%)

Market capitalisation

GBP177m

More on this equity

Research: Industrials

Cohort — Progressing to plan

The relative de-rating of Cohort against its peers since its interim results in December seems somewhat anomalous. The company looks set to maintain solid progress in FY18, which is now coming to a close. Peers in the UK defence sector have continued to face issues that do not directly read across to Cohort. While the UK defence funding environment remains uncertain at present, there appear to be some indications that a more favourable perspective may be developing following recent events. We maintain our forecasts and our fair value currently stands at 508p.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

Cohort

Progressing to plan

Year-end update

Aerospace & defence

30 April 2018

Price

348.5p

Market cap

£143m

Net cash (£m) at 31 October 2017

5.7

Shares in issue

41.0m

Free float

70%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.1)

(3.2)

(18.9)

Rel (local)

(7.3)

(1.2)

(21.7)

52-week high/low

450p

285p

Business description

Cohort is an AIM-listed defence and security company operating across four divisions: MASS (33% of FY18e sales); SEA (36%); MCL (15%); and the 80%-owned Portuguese business EID (16%).

Next events

FY18 results

3 July 2018

Analysts

Andy Chambers

+44 (0)20 3681 2525

Annabel Hewson

+44 (0)20 3077 5700

Cohort is a research client of Edison Investment Research Limited

The relative de-rating of Cohort against its peers since its interim results in December seems somewhat anomalous. The company looks set to maintain solid progress in FY18, which is now coming to a close. Peers in the UK defence sector have continued to face issues that do not directly read across to Cohort. While the UK defence funding environment remains uncertain at present, there appear to be some indications that a more favourable perspective may be developing following recent events. We maintain our forecasts and our fair value currently stands at 508p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/16

112.6

12.0

25.0

6.0

13.9

1.7

04/17

112.7

14.5

26.6

7.1

13.1

2.0

04/18e

119.0

15.4

29.1

8.2

12.0

2.4

04/19e

128.2

16.1

31.2

9.0

11.2

2.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and tax credits of 2.20p in FY16 and 1.30p in FY17.

FY18 expected to see modest growth

The early part of a calendar year is normally a relatively quiet period for newsflow from Cohort, save for any contract developments, and this has been the case again in the final months of FY18. With a greater than usual bias of profitability towards the second half, the market may have become concerned about delivery for the full year. However, the order coverage of H218 revenues was very high at the time of the interim results, with EID’s second half fully covered for example. With the shorter cycle activity lead times at some operations such as MCL, our expectation is that FY18 outlook should be broadly fulfilled.

UK defence constraints

There is a UK defence review in process, and the pace of contracting at the MOD has yet to show any major signs of improvement. However, there have been a few signs of longstanding requirements finally being awarded. From Cohort’s perspective, the situation is not thought to have deteriorated, and indeed there are some major renewals anticipated in FY19, as well as potential new business in export markets. In our view, the issues that have led to the de-rating of UK defence peers, and thus the sector, have been largely specific to the companies involved rather than to continuing pressure on budgets. Indeed, there appears to be a growing consensus that an increase in UK defence spending may be warranted, not just by the shortages in frontline and administrative personnel, but also because of varying, and often resurgent threats. Cohort remains comparatively robust.

Valuation: Premium to peers deserved

Cohort continues to develop in line with expectations and yet is trading on a FY19e P/E discount to its UK defence peers of around 20%. In our view, a premium is deserved to reflect sustained growth. Our fair value currently stands at 508p, rising 5% from 483p previously, reflecting some multiple expansion in the peer group ratings as well as a greater likelihood of delivery of DCF expectations.

Exhibit 1: Financial summary

£m

2016

2017

2018e

2019e

Year end 30 April

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

112.6

112.7

119.0

128.2

Cost of Sales

(79.1)

(73.7)

(83.5)

(90.1)

Gross Profit

33.5

39.0

35.4

38.2

EBITDA

 

 

13.0

15.7

16.6

17.4

Operating Profit (before amort. and except).

11.9

14.5

15.4

16.0

Intangible Amortisation

(6.4)

(11.3)

(5.2)

(4.7)

Exceptionals

(0.3)

(2.3)

0.0

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

5.2

1.0

10.2

11.3

Net Interest

0.1

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

12.0

14.5

15.4

16.1

Profit Before Tax (FRS 3)

 

 

5.3

1.0

10.2

11.3

Tax

0.1

1.1

(1.9)

(2.0)

Profit After Tax (norm)

11.2

12.8

12.7

13.3

Profit After Tax (FRS 3)

5.4

2.1

8.3

9.3

Average Number of Shares Outstanding (m)

40.6

40.4

40.4

40.4

EPS - fully diluted (p)

 

 

26.7

31.0

28.9

30.8

EPS - normalised (p)

 

 

27.2

31.5

29.1

31.2

EPS - (IFRS) (p)

 

 

12.7

9.1

18.5

21.5

Dividend per share (p)

6.0

7.1

8.2

9.0

Gross Margin (%)

29.8

34.6

29.8

29.8

EBITDA Margin (%)

11.5

13.9

14.0

13.6

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

10.6

12.9

12.9

12.5

BALANCE SHEET

Fixed Assets

 

 

59.7

60.6

55.1

50.1

Intangible Assets

49.5

50.6

45.4

40.7

Tangible Assets

10.2

9.9

9.7

9.4

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

54.0

56.3

62.1

74.9

Stocks

2.0

5.3

6.5

7.3

Debtors

27.3

37.8

39.3

42.3

Cash

23.1

12.0

15.0

24.0

Other

1.6

1.2

1.3

1.3

Current Liabilities

 

 

(40.1)

(39.7)

(35.7)

(36.5)

Creditors

(36.8)

(36.1)

(35.7)

(36.5)

Short term borrowings

(3.3)

(3.5)

0.0

0.0

Long Term Liabilities

 

 

(2.7)

(3.2)

(8.5)

(9.9)

Long term borrowings

(0.0)

(0.0)

(5.3)

(6.7)

Other long term liabilities

(2.7)

(3.2)

(3.2)

(3.2)

Net Assets

 

 

70.8

74.0

73.0

78.6

CASH FLOW

Operating Cash Flow

 

 

8.5

2.4

14.0

14.9

Net Interest

0.1

0.0

0.0

0.0

Tax

(1.8)

(1.7)

(2.7)

(2.8)

Capex

(1.0)

(0.9)

(1.0)

(1.1)

Acquisitions/disposals

(0.7)

(9.1)

0.0

0.0

Financing

(3.2)

0.5

(6.1)

0.0

Dividends

(2.2)

(2.5)

(3.0)

(3.4)

Net Cash Flow

(0.3)

(11.4)

1.2

7.6

Opening net debt/(cash)

 

 

(19.7)

(19.8)

(8.5)

(9.7)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.5

0.0

0.0

(0.0)

Closing net debt/(cash)

 

 

(19.8)

(8.5)

(9.7)

(17.3)

Source: Company reports, Edison Investment Research estimates

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Cohort and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Cohort and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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