Cohort — Extending a sound interest

Cohort (AIM: CHRT)

Last close As at 16/07/2024

440.00

11.00 (2.56%)

Market capitalisation

GBP177m

More on this equity

Research: Industrials

Cohort — Extending a sound interest

Cohort has completed the acquisition of ELAC Nautik from Wartsila for a headline consideration of €11.25m, as previously announced. ELAC extends Cohort’s maritime offering and has attractive medium- to long-term prospects. It will make an initial five-month contribution and should be modestly earnings enhancing. More detail should be available with interim results next week, but the lack of a trading comment suggests the ongoing activities remain on track to meet market expectations.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

Cohort

Extending a sound interest

Acquisition of ELAC completed

Aerospace & defence

4 December 2020

Price

611p

Market cap

£251m

Net debt (£m) at 30 April 2020

4.7

Shares in issue

41.0m

Free float

72%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.5

(0.7)

5.7

Rel (local)

(9.2)

(11.2)

14.3

52-week high/low

729p

432.5p

Business description

Cohort is an AIM-listed defence and security company operating across six divisions: MASS (31% of FY20 sales), SEA (24%), MCL (11%), the 80%-owned Portuguese business EID (14%), the 81%-owned Chess Technologies based in the UK (19%), and the newly acquired ELAC SONAR.

Next events

H121 results

10 December 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Cohort is a research client of Edison Investment Research Limited

Cohort has completed the acquisition of ELAC Nautik from Wartsila for a headline consideration of €11.25m, as previously announced. ELAC extends Cohort’s maritime offering and has attractive medium- to long-term prospects. It will make an initial five-month contribution and should be modestly earnings enhancing. More detail should be available with interim results next week, but the lack of a trading comment suggests the ongoing activities remain on track to meet market expectations.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/19

121.2

15.9

33.6

9.1

18.2

1.5

04/20

131.1

17.5

37.1

10.1

16.5

1.7

04/21e

142.1

17.7

33.6

11.1

18.2

1.8

04/22e

158.9

19.4

36.3

12.2

16.8

2.0

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

ELAC extends maritime offering

Cohort has completed the acquisition of ELAC Nautik of Germany from Wartsila, following German regulatory clearance in November. The headline price of €11.25m is as initially announced in December 2019. The acquired company will change its name to ELAC SONAR and will operate as the sixth standalone division of Cohort. It is a market leader in sonar systems for both naval surface ships and submarines accounting for 80–90% of revenues and complements and extends Cohort’s existing maritime presence, notably with SEA. ELAC is export oriented and adds Germany as a domestic market for the group. With almost a century of experience and based in Kiel with around 130 employees, ELAC produces sonars, underwater communications and echo sounders, some of which can be used for commercial applications. It supplies several navies around the globe.

Financially robust with attractive prospects

The headline price does not recognise a substantial cash balance being acquired, which almost offsets the consideration. There will be the usual working capital adjustments but we expect the overall effect on FY21 year-end net debt to be less than £1m, although there is a pension liability of around €9m, which requires modest annual funding of around €0.5m. Trading has been tougher in FY21 partially due to delays caused by the pandemic, and management expect ELAC’s revenues in 2020 to fall slightly to €20.7m (2019: €21.4m), generating an EBIT of €1.0m (2019: €1.4m). The order backlog at 31 October 2020 was €26.0m, with c €12.0m for delivery in calendar year 2021. Cohort believes ELAC has attractive medium-term opportunities as it exploits its latest technology developments.

Valuation: Discount to sector peers

We estimate ELAC enhances EPS by c 2% in FY22. However, our EPS estimates fall by 5% in FY21 and 4% in FY22 due to a higher charge to more correctly reflect the EID and Chess minorities. Cohort appears robust in the current challenging economic climate but trades at a c 5% FY22e P/E discount to UK defence peers.

Revision to estimates

The revision to FY21 and FY22 estimates to add ELAC SONAR are summarised in the table below. As can be seen, the adjusted PBT is modestly enhanced in FY21 and by 4% in FY22.

Our underlying assumption for the continuing Cohort businesses remains unchanged ahead of H120 results on 10 December 2020, although we have increased the minority charge to correctly reflect Chess and EID stakes. This has led to an overall 5% reduction in our adjusted EPS estimates for FY21 and 4% in FY22.

Exhibit 1: Cohort earning revisions

Year to April (£m)

2021e 

2022e

 

Prior

New

% change

Prior

New

% change

Revenue

MASS

41.5

41.5

0.0

44.0

44.0

0.0

SEA

34.6

34.6

0.0

35.6

35.6

0.0

MCL

15.5

15.5

0.0

16.0

16.0

0.0

EID

18.6

18.6

0.0

19.5

19.5

0.0

Chess

26.9

26.9

0.0

28.8

28.8

0.0

ELAC SONAR

 

5.0

 

 

15.0

 

Intra group sales

0.0

0.0

 

0.0

0.0

 

Total group revenue

137.1

142.1

3.6

143.9

158.9

10.4

 

 

 

 

 

 

EBITDA

21.1

21.4

1.5

22.2

23.3

4.8

Adjusted operating profit

 

 

 

 

 

 

MASS

9.0

9.0

0.0

9.5

9.5

0.0

SEA

3.8

3.8

0.0

4.0

4.0

0.0

MCL

1.7

1.7

0.0

1.8

1.8

0.0

EID

3.2

3.2

0.0

3.4

3.4

0.0

Chess

3.8

3.8

 

4.0

4.0

 

ELAC SONAR

 

0.3

 

 

0.9

 

HQ Other and intersegment

(3.0)

(3.0)

0.0

(3.0)

(3.0)

0.0

Adjusted operating profit

18.5

18.8

1.3

19.7

20.6

4.6

 

 

 

 

 

 

Adjusted PBT

17.6

17.7

0.3

18.8

19.4

3.6

 

 

 

 

 

 

EPS - adjusted continuing (p)

35.4

33.6

(4.9)

37.7

36.3

(3.8)

DPS (p)

11.1

11.1

0.0

12.2

12.2

0.0

Net cash / (debt)

(4.2)

(5.0)

19.5

5.1

4.4

(14.4)

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2019

2020

2021e

2022e

Year end 30 April

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

121.2

131.1

142.1

158.9

Cost of Sales

(78.1)

(80.0)

(86.7)

(97.0)

Gross Profit

43.0

51.0

55.3

61.9

EBITDA

 

 

17.3

20.9

21.4

23.3

Operating Profit (before amort. and except.)

16.2

18.2

18.8

20.6

Intangible Amortisation

(9.5)

(7.4)

(6.8)

(5.1)

Exceptionals

(0.7)

(0.1)

0.0

0.0

Other

0.0

0.0

0.0

0.0

Operating Profit

5.9

10.7

12.0

15.5

Net Interest

(0.3)

(0.8)

(1.1)

(1.1)

Profit Before Tax (norm)

 

 

15.9

17.5

17.7

19.4

Profit Before Tax (FRS 3)

 

 

5.7

10.0

10.9

14.4

Tax

(0.6)

(0.3)

(1.9)

(2.7)

Profit After Tax (norm)

13.3

15.2

14.8

15.9

Profit After Tax (FRS 3)

5.1

9.7

8.9

11.7

Average Number of Shares Outstanding (m)

40.7

40.7

40.8

40.8

EPS - fully diluted (p)

 

 

33.4

36.7

33.3

35.9

EPS - normalised (p)

 

 

33.6

37.1

33.6

36.3

EPS - (IFRS) (p)

 

 

13.4

23.5

19.5

25.8

Dividend per share (p)

9.1

10.1

11.1

12.2

Gross Margin (%)

35.5

38.9

38.9

38.9

EBITDA Margin (%)

14.3

15.9

15.0

14.7

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

13.3

13.9

13.2

12.9

BALANCE SHEET

Fixed Assets

 

 

72.9

74.3

78.3

74.6

Intangible Assets

61.9

55.3

54.0

49.0

Tangible Assets

11.0

12.1

16.4

17.7

Right of Use assets

6.9

7.9

7.9

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

75.6

80.1

107.2

102.0

Stocks

13.5

11.5

16.8

17.2

Debtors

42.7

47.1

50.4

54.8

Cash

18.8

20.6

39.1

29.1

Other

0.6

0.9

0.9

1.0

Current Liabilities

 

 

(36.2)

(32.8)

(35.7)

(39.4)

Creditors

(36.1)

(32.8)

(35.7)

(39.4)

Short term borrowings

(0.1)

(0.1)

0.0

0.0

Long Term Liabilities

 

 

(35.3)

(39.8)

(63.6)

(44.3)

Long term borrowings

(25.1)

(25.2)

(44.0)

(24.7)

Lease liabilities

(7.5)

(8.5)

(8.5)

Other long term liabilities

(10.1)

(7.1)

(11.1)

(11.1)

Net Assets

 

 

77.0

81.8

86.2

92.9

CASH FLOW

Operating Cash Flow

 

 

11.6

13.0

15.2

21.7

Net Interest

(0.3)

(0.8)

(1.1)

(1.1)

Tax

(2.7)

(0.6)

(2.8)

(3.5)

Capex

(2.1)

(2.7)

(2.8)

(3.1)

Acquisitions/disposals

(21.0)

(1.2)

(4.5)

0.0

Financing

0.1

(2.2)

0.0

0.0

Dividends

(3.5)

(3.9)

(4.2)

(4.7)

Other

0.0

0.0

0.0

0.0

Net Cash Flow

(17.8)

1.7

(0.3)

9.3

Opening net debt/(cash)

 

 

(11.3)

6.4

4.7

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)

6.4

4.7

5.0

(4.4)

Total financial liabilities

 

 

 

12.2

13.5

4.1

Source: Company reports, 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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

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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

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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

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

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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