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Research: Industrials
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.
Written by
Cohort |
Progressing to plan |
Year-end update |
Aerospace & defence |
30 April 2018 |
Share price performance
Business description
Next events
Analysts
Cohort is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
Research: TMT
During FY17, the successful demonstration of its innovative laser communications technology put Mynaric in a strong position to become preferred supplier to the airborne internet systems planned by Facebook and Google and the mega-constellations of thousands of small satellites proposed by SpaceX and OneWeb. The €27.3m (gross) from the October 2017 placing are being used to accelerate development of the spaceborne terminal, implement the in-house assembly and test capability needed for volume roll-out in FY19, and expand Mynaric’s presence in the US.