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Set to resume growth in FY23

Cohort 27 May 2022 Update
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Cohort

Set to resume growth in FY23

FY22 closing trading update

Aerospace & defence

27 May 2022

Price

503p

Market cap

£207m

Adjusted net cash (£m) at 31 April 2022
(excludes c £8m lease liabilities)

c 11

Shares in issue

41.2m

Free float

72%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.9)

(4.4)

(19.9)

Rel (local)

(9.4)

(4.6)

(23.0)

52-week high/low

630p

450p

Business description

Cohort is an AIM-listed defence and security company operating across six divisions: MASS (32% of H122 sales), SEA (23%), MCL (13%), the 80%-owned Portuguese business EID (4%), the 81%-owned Chess Technologies based in the UK (10%) and ELAC SONAR (18%).

Next events

FY22 preliminary results

July 2022

Analyst

Andy Chambers

+44 (0)20 3681 2525

Cohort is a research client of Edison Investment Research Limited

Cohort indicated in its closing FY22 trading update that it expects to deliver earnings in line with market expectations despite a c £10m shortfall in revenues. Part of the sales impact is due to a contract adjustment at Chess, but pandemic-related delays continued to affect other group companies. Order intake has remained strong and management expectations for FY23 are maintained, with order cover for FY23 sales of 69% (64% for FY21). With increasing global defence spending and a return to growth anticipated from this year, an FY23e P/E of 14.5x does not look demanding.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/20

131.1

17.5

37.1

10.1

13.6

2.0

04/21

143.3

17.9

33.6

11.1

15.0

2.2

04/22e

138.9

14.6

30.1

12.2

16.7

2.4

04/23e

164.2

17.8

34.7

13.4

14.5

2.7

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

FY22 challenges navigated

Management indicated that FY22 earnings should be in line with its H122 expectations, despite lower than anticipated H222 revenues. The improved margin performance reflects improvements at ELAC, MCL, MASS and SEA offsetting weakness at Chess and EID. Order intake remained strong at £183m and the year-end order book was a record of c £287m (FY21: £242.4m). Adjusted net funds (excluding leases) were also stronger than expected, ending the year at c £11m compared to an expectation of a neutral net debt position. Despite the additional burden of inflationary pressures to which it is responding, management is not changing its expectations for FY23 and expects a resumption of organic growth.

Defence environment improving outlook

Despite some supply chain issues arising from the pandemic, the operations of all the group businesses are returning to normal, although management is monitoring and responding to inflationary pressures. Customer engagement is enhanced by the lifting of travel restrictions and resumption of negotiations, and industry events both at home and overseas. The order backlog now extends beyond 2030 and provides enhanced visibility for the group’s sales, especially for Chess, ELAC, MCL and SEA for FY23. Order cover for market revenue expectations starts FY23 at almost £113m (69%), which compares to £100m (64%) a year earlier. As well as some direct calls on defence assets, the conflict in Ukraine has highlighted the need for increased security spending, notably for NATO members and its allies.

Valuation: Improving defence backdrop

We have rolled forward our capped DCF valuation to a FY22 base and it returns a value of 678p (previously 630p), in part reflecting the better-than-expected FY22 cash performance. While FY22 has been challenging, a strong rebound in FY23 should leave the rating undemanding ahead of a return to sustainable growth in FY24, all accompanied by the progressive dividend.

Revisions to earnings estimates

Our earnings estimates are broadly unchanged for both FY22 and FY23, although the divisional mix is different as operations recover and benefit from improving market demand.

The main influence is a contract adjustment at Chess with revenue moving into FY23. In addition, continued supply chain issues and ongoing operational disruptions have reduced sales for several subsidiaries, notably MASS, although all are expected to show earning progress over FY21 except for Chess and EID in Portugal, where issues were apparent at the half-year stage.

Operations are generally returning to a more normal operating environment as travel restrictions are diminishing and client engagement is improving. It is therefore expected that areas which have seen delays should improve as FY23 progresses, for example Electronic Warfare Operational Support (EWOS) contracts and other export activity. There have already been encouraging orders in respect of overseas clients apparent during H222, for example SEA won a multi-million-pound contract to supply its Torpedo Launcher System (TLS) to Hyundai Heavy Industries (HHI) for two new corvettes for the Philippines Navy for delivery in 2023 and 2025.

While the Ukraine conflict is expected to provide a long-term uplift in global defence requirements, as seen by the restored commitments of future investment by NATO partners, the near-term impacts are a bit mixed. Chess and MCL should see improved demand for products arising from the increased security demands, particularly among NATO members and its allies but, as some customer resources are diverted by shifting short-term priorities, some services work is being necessarily deferred.

We expect the accommodation of both existing and new customer requirements to improve as the year progresses. FY23 should see a marked improvement, with sustainable growth from FY24.

Exhibit 1: Cohort earnings revisions

Year to April (£m)

2022e

2023E

Prior

New

% change

Prior

New

% change

Revenues

MASS

42.3

38.8

(8.4)%

44.4

43.4

(2.3)%

SEA

31.3

30.2

(3.6)%

34.4

33.8

(1.8)%

MCL

20.7

21.2

2.6%

21.7

23.6

8.5%

EID

10.5

8.4

(20.0)%

11.0

10.1

(8.6)%

Chess

21.5

18.0

(16.0)%

26.9

26.5

(1.2)%

ELAC SONAR

23.2

22.4

(3.6)%

26.0

26.9

3.3%

Intra group sales

(0.1)

(0.1)

 

0.0

0.0

 

Total Group

149.4

138.9

(7.0)%

164.4

164.2

(0.1)%

EBITDA

18.5

18.3

(1.0)%

21.9

21.9

0.1%

MASS

8.9

8.9

0.3%

9.8

9.6

(2.3)%

SEA

3.8

3.8

0.4%

4.1

4.2

2.3%

MCL

2.6

2.8

6.7%

2.7

2.9

8.5%

EID

0.4

0.3

(20.0)%

0.9

0.6

(31.4)%

Chess

1.0

0.9

(6.7)%

2.6

2.7

4.0%

ELAC SONAR

3.1

3.0

(3.6)%

3.1

3.2

3.3%

HQ Other and intersegment

(4.2)

(4.2)

0.0%

(4.5)

(4.5)

0.0%

Adjusted operating profit

15.5

15.5

(0.3)%

18.7

18.7

0.1%

Adjusted PBT

14.6

14.6

0.1%

17.7

17.8

0.4%

EPS - adjusted continuing (p)

30.0

30.1

0.2%

34.5

34.7

0.6%

DPS (p)

12.2

12.2

0.0%

13.4

13.4

0.0%

Adjusted net cash/(debt)

(0.5)

10.6

N/M

5.9

5.1

(14.4)%

Source: Edison Investment Research

Valuation

We have rolled forward our capped DCF valuation forward to a FY22 base, and the returned value increases to 678p from 630p in December. Around half of the uplift is due to the better-than-expected FY22 cash performance, with the balance relating to the characteristics of the methodology as a company grows cash flows. The sensitivity of the DCF value per share to the WACC and terminal growth rate is shown in Exhibit 2 below.

Exhibit 2: Cohort capped DCF sensitivity analysis 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 value growth rate

0%

834

760

697

678

642

595

553

515

482

452

1%

841

766

703

683

647

599

557

519

486

456

2%

848

773

708

689

652

604

561

523

489

459

3%

855

779

714

694

658

609

565

527

493

462

Source: Edison Investment Research estimates

Exhibit 3: Financial summary

£m

2020

2021

2022e

2023e

Year end 30 April

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

131.1

143.3

138.9

164.2

Cost of Sales

(80.0)

(90.0)

(87.2)

(103.1)

Gross Profit

51.0

53.4

51.7

61.1

EBITDA

 

 

20.9

22.1

18.3

21.9

Operating Profit (before amort. and except.)

18.2

18.6

15.5

18.7

Intangible Amortisation

(7.4)

(10.1)

(6.7)

(3.1)

Exceptionals

(0.1)

(0.7)

0.3

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

10.7

7.8

9.0

15.6

Net Interest

(0.8)

(0.8)

(0.9)

(0.9)

Profit Before Tax (norm)

 

 

17.5

17.9

14.6

17.8

Profit Before Tax (FRS 3)

 

 

10.0

7.1

8.2

14.7

Tax

(0.3)

(1.6)

(1.2)

(2.6)

Profit After Tax (norm)

15.2

13.8

12.5

14.4

Profit After Tax (FRS 3)

9.7

5.5

6.9

12.1

Average Number of Shares Outstanding (m)

40.7

40.8

41.1

41.2

EPS - fully diluted (p)

 

 

36.7

33.3

29.8

34.4

EPS - normalised (p)

 

 

37.1

33.6

30.1

34.7

EPS - (IFRS) (p)

 

 

23.5

13.4

16.4

29.1

Dividend per share (p)

10.1

11.1

12.2

13.4

Gross Margin (%)

38.9

37.2

37.2

37.2

EBITDA Margin (%)

15.9

15.4

13.2

13.3

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

13.9

13.0

11.1

11.4

BALANCE SHEET

Fixed Assets

 

 

74.3

78.4

75.4

73.0

Intangible Assets

55.3

58.8

54.9

51.8

Tangible Assets

12.1

12.5

13.4

14.1

Right of Use assets

6.9

7.1

7.1

7.1

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

80.1

112.5

110.0

125.5

Stocks

11.5

12.9

12.8

15.6

Debtors

47.3

66.0

55.6

70.6

Cash

20.6

32.3

40.3

37.8

Other

0.7

1.4

1.4

1.5

Current Liabilities

 

 

(32.8)

(56.6)

(49.3)

(52.8)

Creditors

(32.8)

(56.6)

(49.3)

(52.8)

Short term borrowings

(0.1)

(0.1)

0.0

0.0

Long Term Liabilities

 

 

(39.8)

(49.2)

(49.1)

(52.2)

Long term borrowings

(25.2)

(29.8)

(29.7)

(32.7)

Lease liabilities

(7.5)

(7.6)

(7.6)

(7.6)

Other long-term liabilities

(7.1)

(11.9)

(11.9)

(11.9)

Net Assets

 

 

81.8

85.1

86.9

93.5

CASH FLOW

Operating Cash Flow

 

 

13.0

21.1

21.0

6.8

Net Interest

(0.8)

(0.8)

(0.9)

(0.9)

Tax

(0.6)

(4.1)

(2.0)

(3.4)

Capex

(2.7)

(1.2)

(2.5)

(2.9)

Acquisitions/disposals

(1.2)

(3.3)

(2.8)

0.0

Financing

(2.2)

(0.3)

0.0

0.0

Dividends

(3.9)

(4.2)

(4.7)

(5.2)

Other

0.0

0.0

0.0

0.0

Net Cash Flow

1.7

7.2

8.1

(5.6)

Opening net debt/(cash)

 

 

6.4

4.7

(2.5)

(10.6)

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)

4.7

(2.5)

(10.6)

(5.1)

Total financial liabilities

 

 

12.2

5.1

(3.0)

2.5

Source: Company reports, Edison Investment Research estimates


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 £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.

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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).

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.

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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

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

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 £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).

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

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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