Cohort — Solid progress through the pandemic

Cohort (AIM: CHRT)

Last close As at 22/06/2024

440.00

11.00 (2.56%)

Market capitalisation

GBP177m

More on this equity

Research: Industrials

Cohort — Solid progress through the pandemic

Cohort has announced that it expects FY21 trading to be in line with consensus expectations, with a better-than-expected cash performance and a record order intake spread across most of the group. However, the Portuguese subsidiary EID has experienced significant order deferrals and leads us to reduce our FY22 EPS estimates by 7%. It leaves the shares trading on an FY22e P/E of 19.9x, a premium to UK defence peers, before growth resumes in FY23 aided by an assumed recovery at EID.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

Cohort

Solid progress through the pandemic

FY21 closing trading update

Aerospace & defence

26 May 2021

Price

670p

Market cap

£275m

Net cash (£m) at 30 April 2021

c 2.0

Shares in issue

41.0m

Free float

72%

Code

CHRT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.9

13.0

26.4

Rel (local)

6.7

6.8

4.1

52-week high/low

680p

520p

Business description

Cohort is an AIM-listed defence and security company operating across six divisions: MASS (31% of FY20 sales), SEA (24%), MCL (11%), the 80%-owned Portuguese business EID (14%), the 81%-owned Chess Technologies based in the UK (19%), and the newly acquired ELAC SONAR.

Next events

FY21 results

July 2021

Analyst

Andy Chambers

+44 (0)20 3681 2525

Cohort is a research client of Edison Investment Research Limited

Cohort has announced that it expects FY21 trading to be in line with consensus expectations, with a better-than-expected cash performance and a record order intake spread across most of the group. However, the Portuguese subsidiary EID has experienced significant order deferrals and leads us to reduce our FY22 EPS estimates by 7%. It leaves the shares trading on an FY22e P/E of 19.9x, a premium to UK defence peers, before growth resumes in FY23 aided by an assumed recovery at EID.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/19

121.2

15.9

33.6

9.1

19.9

1.4

04/20

131.1

17.5

37.1

10.1

18.1

1.5

04/21e

142.1

17.7

33.6

11.1

19.9

1.7

04/22e

158.7

17.7

33.7

12.2

19.9

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY21 trading resilient

Despite constraints on the business from COVID-19 pandemic-related lockdowns around the world, management reports that trading in FY21 was in line with its expectations. We maintain our FY21 revenue and profit estimates, although the cash flow performance is better than anticipated. Adjusted net funds at the year end of around £2m compared to our previous expectation of c £5m of net debt. The company will release FY21 results in late July.

Growth in FY22 held back by EID contract deferrals

Cohort reports a record order intake in FY21 of £210m (FY20 £124m), although EID has seen several anticipated contract awards deferred to 2022 and 2023 that affect around a third of anticipated revenues. It appears these were for higher-margin work, resulting in a weaker product mix that exacerbates lower overhead recovery with operating margins likely to fall to single digits. More positively, the extended FY21 order backlog of £240m (FY20 £183m) provides improved visibility across much of the rest of the group, with 63% (FY20 60%) sales coverage for market estimated FY22 revenues of c£159m. Growth in the other divisions, including the newly acquired ELAC, should compensate for the EID revenue shortfall but are not expected to recover the drop in operating profit. Assuming the deferred EID contracts are awarded as now expected, we would expect revenues and margins to recover toward historic levels commencing in FY23.

Valuation: Rated for medium-term growth potential

With EPS plateauing through FY22 as EID erodes the enhancement from ELAC, the market should be encouraged by the stronger performance across the rest of the group. We expect momentum and recovery at EID to drive a return to meaningful growth in FY23, with the strong balance sheet and banking facilities supporting further investment for growth and value-creating selective acquisitions. Our capped DCF stands at 674p after the latest earnings adjustments.

Revisions to estimates

Our estimates for FY21 are unchanged, However, given the anticipated weaker trading at EID in Portugal, we have revised our FY22 numbers to reflect the management commentary. We still expect overall group revenues to reach almost £159m, but we have reduced expectations for EID significantly as overhead under-recovery and the adverse sales mix impact margins. While we have increased revenues for several of the other activities, these only partially mitigate the anticipated drop in contribution from EID.

As a result, our FY22e adjusted PBT is reduced by almost 9% to £17.7m, which is flat on our FY21 expectation and our adjusted EPS estimate is 7% lower at 33.7p.

We now forecast end April 2021 net cash of £1.7m, broadly in line with management indications.

Exhibit 1: Cohort earnings 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

36.6

2.9

MCL

15.5

15.5

0.0

16.0

16.8

4.9

EID

18.6

18.6

0.0

19.5

13.0

(33.3)

Chess

26.9

26.9

0.0

28.8

29.3

1.9

ELAC SONAR

5.0

5.0

 

15.0

19.0

 

Total group revenues

142.1

142.1

0.0

158.9

158.7

(0.1)

 

 

 

 

 

 

EBITDA

21.4

21.4

0.0

23.3

21.6

(7.3)

Adjusted operating profit

 

 

 

 

 

 

MASS

8.5

8.5

0.0

9.0

9.0

0.0

SEA

4.3

4.3

0.0

4.5

4.6

2.9

MCL

1.7

1.7

0.0

1.8

1.8

4.9

EID

3.2

3.2

0.0

3.4

1.2

(65.2)

Chess

3.8

3.8

0.0

4.0

4.1

1.9

ELAC SONAR

0.3

0.3

0.0

0.9

2.1

132.2

HQ Other and intersegment

(3.0)

(3.0)

0.0

(3.0)

(4.0)

33.3

Adjusted operating profit

18.8

18.8

0.0

20.6

18.9

(8.3)

 

 

 

 

 

 

Adjusted PBT

17.7

17.7

0.0

19.4

17.7

(8.8)

 

 

 

 

 

 

EPS - adjusted continuing (p)

33.6

33.6

0.0

36.3

33.7

(7.1)

DPS (p)

11.1

11.1

0.0

12.2

12.2

0.0

Net cash / (debt)

(5.0)

1.7

N/M

4.4

0.2

(95.3)

Source: Edison Investment Research estimates

Our capped DCF valuation actually increases to a value of 674p per share versus 631p previously. While this may appear counterintuitive, the aggregate performance of the operations other than EID is expected to be stronger than previously anticipated in FY22, providing a higher base cash flow for further growth. With EID’s performance expected to largely recover in the medium to long term this results in increased cash flow in the forecast period and an increased terminal value cashflow.

Exhibit 2: Cohort capped DCF sensitivity to WACC and terminal growth (p per share)

WACC

6.0%

6.5%

7.0%

7.5%

7.6%

8.0%

8.5%

9.0%

Terminal growth rate

0%

868

796

734

681

674

634

593

557

1%

875

802

740

686

680

639

598

561

2%

882

809

746

692

685

644

602

565

3%

889

815

752

697

690

649

607

569

Source: Edison Investment Research estimates

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

158.7

Cost of Sales

(78.1)

(80.0)

(86.7)

(96.9)

Gross Profit

43.0

51.0

55.3

61.8

EBITDA

 

 

17.3

20.9

21.4

21.6

Operating Profit (before amort. and except.)

16.2

18.2

18.8

18.9

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

13.8

Net Interest

(0.3)

(0.8)

(1.1)

(1.1)

Profit Before Tax (norm)

 

 

15.9

17.5

17.7

17.7

Profit Before Tax (FRS 3)

 

 

5.7

10.0

10.9

12.7

Tax

(0.6)

(0.3)

(1.9)

(2.4)

Profit After Tax (norm)

13.3

15.2

14.8

14.5

Profit After Tax (FRS 3)

5.1

9.7

8.9

10.3

Average Number of Shares Outstanding (m)

40.7

40.7

40.8

40.8

EPS - fully diluted (p)

 

 

33.4

36.7

33.3

33.4

EPS - normalised (p)

 

 

33.6

37.1

33.6

33.7

EPS - (IFRS) (p)

 

 

13.4

23.5

19.5

23.2

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

13.6

Operating Margin (before GW and except.) (%)

13.3

13.9

13.2

11.9

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

91.9

102.3

Stocks

13.5

11.5

14.2

17.5

Debtors

42.7

47.1

49.2

56.4

Cash

18.8

20.6

27.6

27.6

Other

0.6

0.9

0.9

1.0

Current Liabilities

 

 

(36.2)

(32.8)

(38.5)

(38.5)

Creditors

(36.1)

(32.8)

(38.5)

(38.5)

Short term borrowings

(0.1)

(0.1)

0.0

0.0

Long Term Liabilities

 

 

(35.3)

(39.8)

(45.4)

(46.9)

Long term borrowings

(25.1)

(25.2)

(25.9)

(27.4)

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

91.5

CASH FLOW

Operating Cash Flow

 

 

11.6

13.0

21.9

10.6

Net Interest

(0.3)

(0.8)

(1.1)

(1.2)

Tax

(2.7)

(0.6)

(2.8)

(3.2)

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

6.4

(1.5)

Opening net debt/(cash)

 

 

(11.3)

6.4

4.7

(1.7)

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

(1.7)

(0.2)

Total financial liabilities

 

 

 

12.2

6.8

8.3

Source: Company data, Edison Investment Research


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 £49,500 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.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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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.

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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

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 £49,500 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 2021 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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