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Research: Industrials
Cohort indicated in its closing FY22 trading update that it expects to deliver earnings in line with market expectations despite a c £10m shortfall in revenues. Part of the sales impact is due to a contract adjustment at Chess, but pandemic-related delays continued to affect other group companies. Order intake has remained strong and management expectations for FY23 are maintained, with order cover for FY23 sales of 69% (64% for FY21). With increasing global defence spending and a return to growth anticipated from this year, an FY23e P/E of 14.5x does not look demanding.
Written by
Cohort |
Set to resume growth in FY23 |
FY22 closing trading update |
Aerospace & defence |
27 May 2022 |
Share price performance
Business description
Next events
Analyst
Cohort is a research client of Edison Investment Research Limited |
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Cohort indicated in its closing FY22 trading update that it expects to deliver earnings in line with market expectations despite a c £10m shortfall in revenues. Part of the sales impact is due to a contract adjustment at Chess, but pandemic-related delays continued to affect other group companies. Order intake has remained strong and management expectations for FY23 are maintained, with order cover for FY23 sales of 69% (64% for FY21). With increasing global defence spending and a return to growth anticipated from this year, an FY23e P/E of 14.5x does not look demanding.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
04/20 |
131.1 |
17.5 |
37.1 |
10.1 |
13.6 |
2.0 |
04/21 |
143.3 |
17.9 |
33.6 |
11.1 |
15.0 |
2.2 |
04/22e |
138.9 |
14.6 |
30.1 |
12.2 |
16.7 |
2.4 |
04/23e |
164.2 |
17.8 |
34.7 |
13.4 |
14.5 |
2.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
FY22 challenges navigated
Management indicated that FY22 earnings should be in line with its H122 expectations, despite lower than anticipated H222 revenues. The improved margin performance reflects improvements at ELAC, MCL, MASS and SEA offsetting weakness at Chess and EID. Order intake remained strong at £183m and the year-end order book was a record of c £287m (FY21: £242.4m). Adjusted net funds (excluding leases) were also stronger than expected, ending the year at c £11m compared to an expectation of a neutral net debt position. Despite the additional burden of inflationary pressures to which it is responding, management is not changing its expectations for FY23 and expects a resumption of organic growth.
Defence environment improving outlook
Despite some supply chain issues arising from the pandemic, the operations of all the group businesses are returning to normal, although management is monitoring and responding to inflationary pressures. Customer engagement is enhanced by the lifting of travel restrictions and resumption of negotiations, and industry events both at home and overseas. The order backlog now extends beyond 2030 and provides enhanced visibility for the group’s sales, especially for Chess, ELAC, MCL and SEA for FY23. Order cover for market revenue expectations starts FY23 at almost £113m (69%), which compares to £100m (64%) a year earlier. As well as some direct calls on defence assets, the conflict in Ukraine has highlighted the need for increased security spending, notably for NATO members and its allies.
Valuation: Improving defence backdrop
We have rolled forward our capped DCF valuation to a FY22 base and it returns a value of 678p (previously 630p), in part reflecting the better-than-expected FY22 cash performance. While FY22 has been challenging, a strong rebound in FY23 should leave the rating undemanding ahead of a return to sustainable growth in FY24, all accompanied by the progressive dividend.
Revisions to earnings estimates
Our earnings estimates are broadly unchanged for both FY22 and FY23, although the divisional mix is different as operations recover and benefit from improving market demand.
The main influence is a contract adjustment at Chess with revenue moving into FY23. In addition, continued supply chain issues and ongoing operational disruptions have reduced sales for several subsidiaries, notably MASS, although all are expected to show earning progress over FY21 except for Chess and EID in Portugal, where issues were apparent at the half-year stage.
Operations are generally returning to a more normal operating environment as travel restrictions are diminishing and client engagement is improving. It is therefore expected that areas which have seen delays should improve as FY23 progresses, for example Electronic Warfare Operational Support (EWOS) contracts and other export activity. There have already been encouraging orders in respect of overseas clients apparent during H222, for example SEA won a multi-million-pound contract to supply its Torpedo Launcher System (TLS) to Hyundai Heavy Industries (HHI) for two new corvettes for the Philippines Navy for delivery in 2023 and 2025.
While the Ukraine conflict is expected to provide a long-term uplift in global defence requirements, as seen by the restored commitments of future investment by NATO partners, the near-term impacts are a bit mixed. Chess and MCL should see improved demand for products arising from the increased security demands, particularly among NATO members and its allies but, as some customer resources are diverted by shifting short-term priorities, some services work is being necessarily deferred.
We expect the accommodation of both existing and new customer requirements to improve as the year progresses. FY23 should see a marked improvement, with sustainable growth from FY24.
Exhibit 1: Cohort earnings revisions
Year to April (£m) |
2022e |
2023E |
||||
Prior |
New |
% change |
Prior |
New |
% change |
|
Revenues |
||||||
MASS |
42.3 |
38.8 |
(8.4)% |
44.4 |
43.4 |
(2.3)% |
SEA |
31.3 |
30.2 |
(3.6)% |
34.4 |
33.8 |
(1.8)% |
MCL |
20.7 |
21.2 |
2.6% |
21.7 |
23.6 |
8.5% |
EID |
10.5 |
8.4 |
(20.0)% |
11.0 |
10.1 |
(8.6)% |
Chess |
21.5 |
18.0 |
(16.0)% |
26.9 |
26.5 |
(1.2)% |
ELAC SONAR |
23.2 |
22.4 |
(3.6)% |
26.0 |
26.9 |
3.3% |
Intra group sales |
(0.1) |
(0.1) |
|
0.0 |
0.0 |
|
Total Group |
149.4 |
138.9 |
(7.0)% |
164.4 |
164.2 |
(0.1)% |
EBITDA |
18.5 |
18.3 |
(1.0)% |
21.9 |
21.9 |
0.1% |
MASS |
8.9 |
8.9 |
0.3% |
9.8 |
9.6 |
(2.3)% |
SEA |
3.8 |
3.8 |
0.4% |
4.1 |
4.2 |
2.3% |
MCL |
2.6 |
2.8 |
6.7% |
2.7 |
2.9 |
8.5% |
EID |
0.4 |
0.3 |
(20.0)% |
0.9 |
0.6 |
(31.4)% |
Chess |
1.0 |
0.9 |
(6.7)% |
2.6 |
2.7 |
4.0% |
ELAC SONAR |
3.1 |
3.0 |
(3.6)% |
3.1 |
3.2 |
3.3% |
HQ Other and intersegment |
(4.2) |
(4.2) |
0.0% |
(4.5) |
(4.5) |
0.0% |
Adjusted operating profit |
15.5 |
15.5 |
(0.3)% |
18.7 |
18.7 |
0.1% |
Adjusted PBT |
14.6 |
14.6 |
0.1% |
17.7 |
17.8 |
0.4% |
EPS - adjusted continuing (p) |
30.0 |
30.1 |
0.2% |
34.5 |
34.7 |
0.6% |
DPS (p) |
12.2 |
12.2 |
0.0% |
13.4 |
13.4 |
0.0% |
Adjusted net cash/(debt) |
(0.5) |
10.6 |
N/M |
5.9 |
5.1 |
(14.4)% |
Source: Edison Investment Research
Valuation
We have rolled forward our capped DCF valuation forward to a FY22 base, and the returned value increases to 678p from 630p in December. Around half of the uplift is due to the better-than-expected FY22 cash performance, with the balance relating to the characteristics of the methodology as a company grows cash flows. The sensitivity of the DCF value per share to the WACC and terminal growth rate is shown in Exhibit 2 below.
Exhibit 2: Cohort capped DCF sensitivity analysis 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 value growth rate |
||||||||||
0% |
834 |
760 |
697 |
678 |
642 |
595 |
553 |
515 |
482 |
452 |
1% |
841 |
766 |
703 |
683 |
647 |
599 |
557 |
519 |
486 |
456 |
2% |
848 |
773 |
708 |
689 |
652 |
604 |
561 |
523 |
489 |
459 |
3% |
855 |
779 |
714 |
694 |
658 |
609 |
565 |
527 |
493 |
462 |
Source: Edison Investment Research estimates
Exhibit 3: Financial summary
£m |
2020 |
2021 |
2022e |
2023e |
||
Year end 30 April |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
131.1 |
143.3 |
138.9 |
164.2 |
Cost of Sales |
(80.0) |
(90.0) |
(87.2) |
(103.1) |
||
Gross Profit |
51.0 |
53.4 |
51.7 |
61.1 |
||
EBITDA |
|
|
20.9 |
22.1 |
18.3 |
21.9 |
Operating Profit (before amort. and except.) |
18.2 |
18.6 |
15.5 |
18.7 |
||
Intangible Amortisation |
(7.4) |
(10.1) |
(6.7) |
(3.1) |
||
Exceptionals |
(0.1) |
(0.7) |
0.3 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
10.7 |
7.8 |
9.0 |
15.6 |
||
Net Interest |
(0.8) |
(0.8) |
(0.9) |
(0.9) |
||
Profit Before Tax (norm) |
|
|
17.5 |
17.9 |
14.6 |
17.8 |
Profit Before Tax (FRS 3) |
|
|
10.0 |
7.1 |
8.2 |
14.7 |
Tax |
(0.3) |
(1.6) |
(1.2) |
(2.6) |
||
Profit After Tax (norm) |
15.2 |
13.8 |
12.5 |
14.4 |
||
Profit After Tax (FRS 3) |
9.7 |
5.5 |
6.9 |
12.1 |
||
Average Number of Shares Outstanding (m) |
40.7 |
40.8 |
41.1 |
41.2 |
||
EPS - fully diluted (p) |
|
|
36.7 |
33.3 |
29.8 |
34.4 |
EPS - normalised (p) |
|
|
37.1 |
33.6 |
30.1 |
34.7 |
EPS - (IFRS) (p) |
|
|
23.5 |
13.4 |
16.4 |
29.1 |
Dividend per share (p) |
10.1 |
11.1 |
12.2 |
13.4 |
||
Gross Margin (%) |
38.9 |
37.2 |
37.2 |
37.2 |
||
EBITDA Margin (%) |
15.9 |
15.4 |
13.2 |
13.3 |
||
Operating Margin (before GW and except.) (%) |
13.9 |
13.0 |
11.1 |
11.4 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
74.3 |
78.4 |
75.4 |
73.0 |
Intangible Assets |
55.3 |
58.8 |
54.9 |
51.8 |
||
Tangible Assets |
12.1 |
12.5 |
13.4 |
14.1 |
||
Right of Use assets |
6.9 |
7.1 |
7.1 |
7.1 |
||
Investments |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Assets |
|
|
80.1 |
112.5 |
110.0 |
125.5 |
Stocks |
11.5 |
12.9 |
12.8 |
15.6 |
||
Debtors |
47.3 |
66.0 |
55.6 |
70.6 |
||
Cash |
20.6 |
32.3 |
40.3 |
37.8 |
||
Other |
0.7 |
1.4 |
1.4 |
1.5 |
||
Current Liabilities |
|
|
(32.8) |
(56.6) |
(49.3) |
(52.8) |
Creditors |
(32.8) |
(56.6) |
(49.3) |
(52.8) |
||
Short term borrowings |
(0.1) |
(0.1) |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(39.8) |
(49.2) |
(49.1) |
(52.2) |
Long term borrowings |
(25.2) |
(29.8) |
(29.7) |
(32.7) |
||
Lease liabilities |
(7.5) |
(7.6) |
(7.6) |
(7.6) |
||
Other long-term liabilities |
(7.1) |
(11.9) |
(11.9) |
(11.9) |
||
Net Assets |
|
|
81.8 |
85.1 |
86.9 |
93.5 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
13.0 |
21.1 |
21.0 |
6.8 |
Net Interest |
(0.8) |
(0.8) |
(0.9) |
(0.9) |
||
Tax |
(0.6) |
(4.1) |
(2.0) |
(3.4) |
||
Capex |
(2.7) |
(1.2) |
(2.5) |
(2.9) |
||
Acquisitions/disposals |
(1.2) |
(3.3) |
(2.8) |
0.0 |
||
Financing |
(2.2) |
(0.3) |
0.0 |
0.0 |
||
Dividends |
(3.9) |
(4.2) |
(4.7) |
(5.2) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
1.7 |
7.2 |
8.1 |
(5.6) |
||
Opening net debt/(cash) |
|
|
6.4 |
4.7 |
(2.5) |
(10.6) |
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) |
4.7 |
(2.5) |
(10.6) |
(5.1) |
||
Total financial liabilities |
|
|
12.2 |
5.1 |
(3.0) |
2.5 |
Source: Company reports, Edison Investment Research estimates
|
|
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