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Research: Industrials
Cohort has delivered a resilient H121 performance, with operating profit rising on 10% lower revenues. There will be a significant second-half weighting as management still expects to deliver a similar overall performance from the continuing businesses to FY20, supported by a record order backlog. In addition, ELAC SONAR will makes its initial contribution in the second half. Our estimates are maintained and the shares trade at a c 5% FY22e P/E rating discount to UK defence peers.
Written by
Cohort |
Robust in a challenging environment |
H121 results |
Aerospace & defence |
10 December 2020 |
Share price performance
Business description
Next events
Analyst
Cohort is a research client of Edison Investment Research Limited |
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Cohort has delivered a resilient H121 performance, with operating profit rising on 10% lower revenues. There will be a significant second-half weighting as management still expects to deliver a similar overall performance from the continuing businesses to FY20, supported by a record order backlog. In addition, ELAC SONAR will makes its initial contribution in the second half. Our estimates are maintained and the shares trade at a c 5% FY22e P/E rating discount to UK defence peers.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
04/19 |
121.2 |
15.9 |
33.6 |
9.1 |
18.0 |
1.5 |
04/20 |
131.1 |
17.5 |
37.1 |
10.1 |
16.3 |
1.7 |
04/21e |
142.1 |
17.7 |
33.6 |
11.1 |
18.0 |
1.8 |
04/22e |
158.9 |
19.4 |
36.3 |
12.2 |
16.7 |
2.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
A positive start to FY21
Trading in H121 continued to be affected by the pandemic, which created some delivery issues across the group, but Cohort continues to execute its growth strategy successfully. Group revenues of £54.4m (H120: £60.2m) were down 10%, with MASS and SEA stable and a lower contribution from EID, Chess and MCL. Adjusted operating profit rose 8% to £4.3m (H120: £4.0m). Following a restructuring that was completed in July, SEA returned to healthy profitability while MASS and EID improved contribution due to better businesses mixes. MCL was lower mainly due to lower naval deliveries to the MOD, while Chess reported against a strong H120 comparison. Operating cash flow was again better than management’s expectations and H121 adjusted net debt (excluding lease liabilities) was £6.1m (H120 £6.8m). The interim dividend was increased by 9% to 3.5p. Order intake was up 15% to £89.2m (H120: £77.2m), with Chess performing particularly well with £51m of orders booked.
Order backlog continues to grow favourably
Prospects are underpinned by the record order backlog of £218.5m, which provides 92% (H120: 83%) cover for FY21 consensus sales, well ahead of the same point last year. Shorter cycle infill orders, notably at MCL, are expected to fill the gap and management still expects strong H221 performance to deliver flat profitability this year. A number of order prospects across the group should support a healthy backlog evolution during H221, including contracts for the recently acquired ELAC SONAR business.
Valuation: A modest discount to peers and DCF
Cohort is performing robustly in the current challenging economic climate, trading at a c 5% FY22e P/E discount to UK defence peers. This is consistent with the upside to our capped DCF valuation, which stands at 631p per share.
H121 results summary
Cohort delivered a robust H121 performance despite the pandemic, which continued to affect operations to differing extents, through disruption and delays to marketing activities, ordering processes and contract placement by customers. The key highlights of the H121 results are as follows:
■
Revenues fell 10% to £54.4m (H120: £60.2m), with Chess, MCL and EID all lower, while SEA and MASS broadly maintained sales.
■
Adjusted operating profit was up 8% to £4.3m (H120: £4.0m), as SEA returned to profit following restructuring. MASS continued to make progress, with higher levels of long-term managed service activity, including support to the UK government to respond to the COVID-19 pandemic. EID also benefited from a better mix of revenues with a higher level of naval work. Chess and MCL both made lower contributions. Chess had a strong mix of activity in H120, including export deliveries of counter drone systems that did not recur and a higher proportion of deliveries of lower-margin systems with higher levels of bought-in content. MCL experienced lower UK MOD deliveries, primarily to the Royal Navy, and experienced some delays to orders as the MOD directed resources to the pandemic.
■
Adjusted profit was before exceptional items at SEA of £1.1m (H120: nil) comprising restructuring costs of £573k and a £522k loss on disposal of the subsea activity, as well as the £3.3m (H120 £3.7m) for group amortisation of acquired intangibles.
■
Adjusted EPS were 12% higher at 7.74p (H120: 6.94p).
■
The interim dividend was increased by 9% to 3.50p (H119: 3.20p), maintaining the group’s progressive dividend policy.
■
Adjusted net debt (excluding lease liabilities) of £6.1m (H120: £6.8m) was slightly above the FY20 level of £4.7m despite a cash flow performance better than management expectations.
■
H121 saw another strong period of order intake, up 15% to £89.2m (H120: £77.2m), with Chess in particular performing strongly with £51m of orders booked.
■
The period-end closing order book of £218.5m (end October 2019: £206.7m), was again a record and was up from £183.8m at the start of the year. With £71m of the backlog to be delivered in H221, this provides strong order cover of 92% for FY21 consensus forecast revenue expectations before the addition of ELAC. The ELAC order backlog stood at €26.0m at 31 October 2020 and management believe it has attractive medium-term opportunities.
The small non-core subsea business that was acquired in 2014 as part of J+S was sold on 1 September 2020, generating an exceptional loss on disposal of £522k. The ELAC SONAR acquisition was completed on 2 December and made no contribution to the H121 results (see our note, Extending a sound interest).
Outlook
Management points to the record order backlog as support for another strong second half of the year, with 92% of consensus revenue expectations covered by orders, a significantly higher level than at the same stage of FY20.
Management’s expectations for FY21 adjusted operating profit performance is summarised as:
■
MASS: after a strong H120 margin performance (22%) due to the mix of activity, the FY21 margin is expected to return to closer to historic levels of around 19%.
■
SEA: following its restructuring management expect a strong H221 performance with £11.9m of its £29.8m H121 order book deliverable in H221.
■
MCL: the short-term ordering patterns at MCL give the lowest visibility in the group. Management expects full-year performance will match FY20 levels despite the H121 shortfall.
■
EID: management is confident EID will deliver a stronger performance in H221, ahead of last year.
■
Chess: order cover of 90% following the strong H121 intake underpins a much stronger H220 performance.
■
ELAC SONAR: will make its initial contribution in H221, which is expected to have little effect on EPS.
Overall, the record order backlog underpins medium- and long-term revenues, and management see a number of major renewals and new order opportunities that are expected to be won in H221. With the addition of ELAC, the length of the order book also extends with many maritime programmes expected to stretch well into the next decade.
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Exhibit 1: Cohort order backlog and expected execution schedule |
|
|
Source: Company reports |
Management notes the longer term may see some renewed constraint on defence budgets as governments seek to address the costs of COVID-19 responses. However, the recently announced £4bn per year increase in UK defence spending contradicts and the cyber security aspect of that increment should be beneficial for Cohort, among others.
Earnings revisions
The only change we make to our earnings estimates is a slight adjustment of the profit contributions between SEA and MASS, with all other estimates unchanged at the divisional and group level.
Exhibit 2: Cohort earnings estimates 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 |
5.0 |
|
15.0 |
15.0 |
|
Total group |
142.1 |
142.1 |
0.0 |
158.9 |
158.9 |
0.0 |
|
|
|
|
|
|
|
EBITDA |
21.4 |
21.4 |
0.0 |
23.3 |
23.3 |
0.0 |
Adjusted operating profit |
|
|
|
|
|
|
MASS |
9.0 |
8.5 |
(5.4) |
9.5 |
9.0 |
(5.4) |
SEA |
3.8 |
4.3 |
12.7 |
4.0 |
4.5 |
13.1 |
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 |
0.3 |
|
0.9 |
0.9 |
|
HQ Other and intersegment |
(3.0) |
(3.0) |
0.0 |
(3.0) |
(3.0) |
0.0 |
Adjusted operating profit |
18.8 |
18.8 |
0.0 |
20.6 |
20.6 |
0.0 |
|
|
|
|
|
|
|
Adjusted PBT |
17.7 |
17.7 |
0.0 |
19.4 |
19.4 |
0.0 |
|
|
|
|
|
|
|
EPS - adjusted continuing (p) |
33.6 |
33.6 |
0.0 |
36.3 |
36.3 |
0.0 |
DPS (p) |
11.1 |
11.1 |
0.0 |
12.2 |
12.2 |
0.0 |
Net cash / (debt) |
(5.0) |
(5.0) |
0.0 |
4.4 |
4.4 |
0.0 |
Source: Edison Investment Research
Exhibit 3: 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
|
|
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