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Research: Industrials
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.
Written by
Cohort |
Solid progress through the pandemic |
FY21 closing trading update |
Aerospace & defence |
26 May 2021 |
Share price performance
Business description
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Analyst
Cohort is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
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