Cohort has announced its first international acquisition, purchasing Empresa de Investigação e Desenvolvimento de Electrónica, SA (EID), a Portuguese supplier of advanced defence communications systems across naval and land systems, for a net consideration of €16m. EID not only brings a new home market in Portugal, but also access to a thriving export base encompassing customers in 14 countries across five continents. With the business creating a new fifth leg to the group and the deal expected to be earnings enhancing in the current year, we believe Cohort has demonstrated that it is now ready to push on in its international expansion. Our fair value rises to 390p/share.
Cohort has clearly laid out its prerequisites for bolt-on acquisitions: the acquisition of EID ticks all the right boxes in terms of desired additions to the group. The deal will be financed using a combination of a partial drawdown of a new £25m facility being negotiated and existing cash resources. With EID providing complementary products and markets to those already being served by Cohort, as well as increasing manufacturing flexibility for the group with a well invested and low-cost electronics production facility, we view the deal as positive.
It has become increasingly apparent that export and international business is becoming a greater part of the Cohort story. EID provides a further step in that strategy, which will see international revenues lift from the current 19% to closer to 30%. While export business can be lumpy in nature, the addition of EID provides a cost-effective European manufacturing base and less complex product suite than the UK-centric focused equivalent in Cohort. We believe this opens up potential new markets beyond Cohort’s traditional reach.
With greater access to higher-margin international markets, we believe Cohort is positioning itself to provide not only increased growth potential, but also the opportunity to improve margins. We forecast that the EID acquisition will be c 3% earnings enhancing in FY16 and c 8% in FY17, and adjust our forecasts accordingly. Our SOTP-based fair value using a CY16 basis to reflect the first full year of EID ownership increases to 390p/share (previously 367p/share).