Cohort — Reversing anticipated FY24 tax benefit

Cohort (AIM: CHRT)

Last close As at 17/05/2024

440.00

11.00 (2.56%)

Market capitalisation

GBP177m

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Cohort — Reversing anticipated FY24 tax benefit

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 As the proposed tax cut has now been withdrawn, it is necessary to reverse that adjustment.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.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Cohort

Reversing anticipated FY24 tax benefit

FY24 estimate update

Aerospace and defence

18 October 2022

Price

482.5p

Market cap

£199m

Adjusted net cash (£m) at 30 April 2022
(excludes £10.1m lease liabilities)

11.0

Shares in issue

41.2m

Free float

72%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.4)

(6.9)

(17.8)

Rel (local)

(0.6)

(3.0)

(10.4)

52-week high/low

630p

433p

Business description

Cohort is an AIM-listed defence and security company operating across six divisions: MASS (28% of FY22 sales), SEA (22%), MCL (16%), the 80%-owned Portuguese business EID (6%), the 81%-owned Chess Dynamics based in the UK (12%) and ELAC SONAR in Germany (16%).

Next events

H123 results

December 2022

Analyst

Andy Chambers

+44 (0)20 3681 2525

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 As the proposed tax cut has now been withdrawn, it is necessary to reverse that adjustment.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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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


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.

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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.

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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 £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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