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GBP177m
In our recent note following the trading update on 26 September 2022, we upgraded our FY24 EPS estimate to reflect an expected cut in future UK corporation tax rates. As the proposed tax cut has now been withdrawn, it is necessary to reverse that adjustment. As a result, Cohort is trading at a still undemanding FY24e multiple of 13.6x and, while falling by 6% to 683p, the DCF value remains at a substantial premium to the current share price.
Cohort |
Reversing anticipated FY24 tax benefit |
FY24 estimate update |
Aerospace and defence |
18 October 2022 |
Share price performance
Business description
Next events
Analyst
CohortCohort is a research client of Edison Investment Research Limited |
In our recent note following the trading update on 26 September 2022, we upgraded our FY24 EPS estimate to reflect an expected cut in future UK corporation tax rates. As the proposed tax cut has now been withdrawn, it is necessary to reverse that adjustment. As a result, Cohort is trading at a still undemanding FY24e multiple of 13.6x and, while falling by 6% to 683p, the DCF value remains at a substantial premium to the current share price.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
04/21 |
143.3 |
17.9 |
33.6 |
11.1 |
14.4 |
2.3 |
04/22 |
137.8 |
14.7 |
31.1 |
12.2 |
15.5 |
2.5 |
04/23e |
164.1 |
17.6 |
34.2 |
13.4 |
14.1 |
2.8 |
04/24e |
178.2 |
19.6 |
35.6 |
14.7 |
13.6 |
3.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
No change to trading prospects
Nothing has changed in terms of trading prospects since we our last update, so our pre-tax forecasts remain unchanged. As UK corporation tax rates are now set to rise from FY24 as previously intended, we are returning our FY24 tax expectation to the rate used before the last update. We still expect a return to organic growth, although with cash available for future investment returning to previous levels.
Balancing geopolitics with budgets
The upheaval in UK politics has raised the probable requirement for future government spending cuts. Hopes for an increase in defence spending to 3% of GDP may be dashed, but an increase in force requirements remains in focus due to the current geopolitical tensions, not just in Europe. Meanwhile, the war in Ukraine is highlighting operational requirements, which Cohort’s subsidiaries are well positioned to meet, for example counter-UAV capabilities, hearing protection and EWOS. Longer-term programmes such as the UK submarine programme seem unlikely to be altered and provide good visibility for Cohort’s maritime exposures.
Valuation: Yet to reflect growth potential
While it is frustrating to have to reverse the tax benefit, the resulting P/E multiple of 13.6x does not look demanding in the context of the current promising outlook for defence and security markets globally. As Cohort returns to sustainable organic growth from FY24, markets are likely to pay more attention to its attributes. The return to organic growth should support the progressive dividend policy. Our capped DCF is reduced by the higher future tax burden, which unwinds our previous increase. It now stands at 683p per share, indicating significant potential.
Earnings revisions
As stated, the only change to our estimates is the tax charge assumed for FY24, which also affects cash flow in FY24 and beyond.
Exhibit 1: Cohort earnings revisions
Year to April (£m) |
2023e |
2024e |
||||
|
Prior |
New |
% change |
Prior |
New |
% change |
Revenues |
||||||
MASS |
44.5 |
44.5 |
0.0% |
46.8 |
46.8 |
0.0% |
SEA |
34.7 |
34.7 |
0.0% |
38.2 |
38.2 |
0.0% |
MCL |
25.2 |
25.2 |
0.0% |
27.2 |
27.2 |
0.0% |
EID |
10.8 |
10.8 |
0.0% |
12.6 |
12.6 |
0.0% |
Chess |
26.2 |
26.2 |
0.0% |
27.5 |
27.5 |
0.0% |
ELAC SONAR |
22.6 |
22.6 |
0.0% |
26.0 |
26.0 |
0.0% |
Intra group sales |
0.0 |
0.0 |
|
0.0 |
0.0 |
|
Total group |
164.1 |
164.1 |
0.0% |
178.2 |
178.2 |
0.0% |
EBITDA |
22.8 |
22.8 |
0.0% |
25.1 |
25.1 |
0.0% |
Adjusted operating profit |
|
|
|
|
|
|
MASS |
9.8 |
9.8 |
0.0% |
10.1 |
10.1 |
0.0% |
SEA |
4.3 |
4.3 |
0.0% |
4.6 |
4.6 |
0.0% |
MCL |
3.0 |
3.0 |
0.0% |
3.3 |
3.3 |
0.0% |
EID |
0.5 |
0.5 |
0.0% |
1.2 |
1.2 |
0.0% |
Chess |
2.6 |
2.6 |
0.0% |
3.0 |
3.0 |
0.0% |
ELAC SONAR |
2.7 |
2.7 |
0.0% |
3.1 |
3.1 |
0.0% |
HQ Other and intersegment |
(4.5) |
(4.5) |
0.0% |
(4.7) |
(4.7) |
0.0% |
Adjusted operating profit |
18.5 |
18.5 |
0.0% |
20.6 |
20.6 |
0.0% |
Adjusted PBT |
17.6 |
17.6 |
0.0% |
19.6 |
19.6 |
0.0% |
EPS - adjusted continuing (p) |
34.2 |
34.2 |
0.0% |
38.1 |
35.6 |
(6.4)% |
DPS (p) |
13.4 |
13.4 |
0.0% |
14.7 |
14.7 |
0.0% |
Adjusted net cash (excluding leases) |
5.0 |
5.0 |
0.0% |
11.3 |
10.3 |
(8.7)% |
Source: Edison Investment Research estimates
The reversal of the future tax cash benefits also returns our capped DCF value back to its previous level of 683p. The sensitivity of our DCF model to WACC and terminal growth rates is shown in Exhibit 2 below.
Exhibit 2: Cohort capped DCF valuation sensitivity 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 growth rate |
||||||||||
0% |
842 |
769 |
707 |
683 |
652 |
605 |
563 |
526 |
493 |
464 |
1% |
849 |
775 |
712 |
688 |
658 |
610 |
568 |
530 |
497 |
467 |
2% |
856 |
782 |
718 |
694 |
663 |
615 |
572 |
534 |
501 |
471 |
3% |
863 |
788 |
724 |
699 |
668 |
619 |
576 |
538 |
504 |
474 |
Source: Edison Investment Research estimates
Exhibit 3: Financial summary
£m |
2021 |
2022 |
2023e |
2024e |
||
Year end 30 April |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
143.3 |
137.8 |
164.1 |
178.2 |
Cost of Sales |
(90.0) |
(81.2) |
(96.7) |
(105.0) |
||
Gross Profit |
53.4 |
56.6 |
67.4 |
73.2 |
||
EBITDA |
|
|
22.1 |
19.4 |
22.8 |
25.1 |
Operating Profit (before amort. and except.) |
18.6 |
15.5 |
18.5 |
20.6 |
||
Intangible Amortisation |
(10.1) |
(6.9) |
(3.1) |
(2.9) |
||
Exceptionals |
(0.7) |
2.4 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
7.8 |
11.1 |
15.4 |
17.7 |
||
Net Interest |
(0.8) |
(0.9) |
(0.9) |
(1.0) |
||
Profit Before Tax (norm) |
|
|
17.9 |
14.7 |
17.6 |
19.6 |
Profit Before Tax (FRS 3) |
|
|
7.1 |
10.2 |
14.5 |
16.7 |
Tax |
(1.6) |
(1.5) |
(2.5) |
(3.9) |
||
Profit After Tax (norm) |
13.8 |
12.2 |
14.2 |
14.9 |
||
Profit After Tax (FRS 3) |
5.5 |
8.7 |
11.9 |
12.8 |
||
Average Number of Shares Outstanding (m) |
40.8 |
40.8 |
41.2 |
41.2 |
||
EPS - fully diluted (p) |
|
|
33.3 |
30.9 |
34.0 |
35.5 |
EPS - normalised (p) |
|
|
33.6 |
31.1 |
34.2 |
35.6 |
EPS - (IFRS) (p) |
|
|
13.4 |
22.5 |
28.7 |
30.6 |
Dividend per share (p) |
11.1 |
12.2 |
13.4 |
14.7 |
||
Gross Margin (%) |
37.2 |
41.1 |
41.1 |
41.1 |
||
EBITDA Margin (%) |
15.4 |
14.1 |
13.9 |
14.1 |
||
Operating Margin (before GW and except.) (%) |
13.0 |
11.3 |
11.2 |
11.6 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
78.4 |
81.7 |
80.7 |
79.4 |
Intangible Assets |
58.8 |
59.8 |
57.9 |
55.0 |
||
Tangible Assets |
12.5 |
12.3 |
13.2 |
14.8 |
||
Right of Use assets |
7.1 |
9.6 |
9.6 |
9.6 |
||
Investments |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
112.5 |
121.5 |
134.6 |
137.0 |
Stocks |
12.9 |
22.8 |
26.3 |
27.9 |
||
Debtors |
66.0 |
56.2 |
65.6 |
71.3 |
||
Cash |
32.3 |
40.4 |
40.4 |
35.4 |
||
Other |
1.4 |
2.2 |
2.3 |
2.4 |
||
Current Liabilities |
|
|
(56.6) |
(94.5) |
(64.8) |
(69.6) |
Creditors |
(56.6) |
(65.1) |
(64.8) |
(69.6) |
||
Short term borrowings |
(0.1) |
(29.4) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(49.2) |
(19.5) |
(54.8) |
(44.5) |
Long term borrowings |
(29.8) |
(0.0) |
(35.4) |
(25.0) |
||
Lease liabilities |
(7.6) |
(10.1) |
(10.1) |
(10.1) |
||
Other long term liabilities |
(11.9) |
(9.3) |
(9.3) |
(9.3) |
||
Net Assets |
|
|
85.1 |
89.2 |
95.6 |
102.4 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
21.1 |
22.9 |
8.1 |
21.1 |
Net Interest |
(0.8) |
(0.9) |
(0.9) |
(1.0) |
||
Tax |
(4.1) |
(2.5) |
(3.3) |
(4.7) |
||
Capex |
(1.2) |
(2.0) |
(3.3) |
(4.5) |
||
Acquisitions/disposals |
(3.3) |
(2.3) |
(1.4) |
0.0 |
||
Financing |
(0.3) |
(2.1) |
0.0 |
0.0 |
||
Dividends |
(4.2) |
(4.7) |
(5.2) |
(5.7) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
7.2 |
8.5 |
(6.0) |
5.3 |
||
Opening net debt/(cash) |
|
|
4.7 |
(2.5) |
(11.0) |
(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) |
(2.5) |
(11.0) |
(5.0) |
(10.3) |
||
Total net financial liabilities |
|
|
5.1 |
(0.9) |
5.1 |
(0.2) |
Source: Company reports, Edison Investment Research estimates
|
|
Mendus secured a partnership with Minaris Regenerative Medicine, a leading contract development and manufacturing organisation in the cell and gene therapy space. The agreement will allow technology transfer for DCP-001 to enable manufacturing for potential pivotal-stage trials and commercial production. Mendus has previously developed optimised, large-scale capabilities for the manufacture of DCP-001 (its cancer relapse vaccine) in house. The Phase II ADVANCE-II trial (NCT03697707), investigating DCP-001 as a maintenance therapy in acute myeloid leukaemia (AML) is expected to report important survival data in Q422. We view the agreement with Minaris as an encouraging sign for DCP-001.
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