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Relevant experience Cohort has appointed ex-Leonardo Chris Axcell as its first chief operating officer as it looks to accelerate growth, pursue strategic acquisitions and strengthen operational delivery amid rising UK and allied nation defence spending. Axcell will work alongside the CEO to provide oversight and strengthen operational performance across the Group. At Leonardo UK, he held multiple technical and leadership roles including VP Surveillance & Protection Technologies, VP Sensors and, most recently, SVP Integrated Sensing & Protection (ISP) where he was responsible for the £300m ISP revenue line, along with its c.1,000 employees and two UK sites, where growth was delivered ahead of market. In Axcell's portfolio were products across electro-optics, electronic warfare and communications, technology directly relevant to Cohort. He states in the press release “The UK defence industry is currently in a critical period, with businesses ready to respond to the ambitions set out by the SDR and increased global defence spend. Cohort’s unique model enables highly capable, specialist businesses to scale rapidly while retaining the agility of SMEs. This will be crucial as governments seek faster capability delivery and resilient supply chains”. Our view / valuation: This is an encouraging development for Cohort. Chris Axcell’s experience appears highly complementary, at an important stage for the company and market. The shares trade on a CY26E P/E of c.17.5x, EV/EBITDA of 10.0x and FCF yield of c.4.6%. This represents a material discount to EU peers despite access to those markets and comparable margins.
Cohort plc
MCL contract win Cohort subsidiary Marlborough Communications Ltd has been awarded a £14m contract by a UK government customer for immediate delivery of uncrewed air systems, together with in-service support for two years. MCL will work with its long-term partner Skydio to supply these systems. In addition, MCL has received an order valued at £4m for supply of tactical audio systems for a UK customer. Sufficient orders have now been secured to underpin fully the Group’s 2025/26 financial year consensus forecast revenue. FY cover was 96% at H1. This is very encouraging news and a demonstration of MCL’s expert engineering meeting urgent needs. Valuation: The shares trade on a CY26E P/E of 18.4x (significantly less than the EU peer average, despite access to those markets and similar margins), EV/EBITDA of 10.6x and FCF yield of 4.3%. Next event: Cohort will be presenting at our Defence & Tech conference in New York next week.
Cohort is a leading mid-tier defence manufacturer with strong market positions and a healthy pipeline. The recent pull back in the shares and more attractive valuation, present an excellent opportunity to BUY, target price 1,500p. Recent H1 results were robust, and a strong order book has been sustained, but the market reacted somewhat badly to lower margins in the Sensors and Effectors unit. We believe this underperformance is temporary, and divisional and Group margins will improve year-on-year. The macro environment remains supportive with higher defence spending across NATO and other countries. The Group’s orderbook is healthy and diverse, and the balance sheet is strong. Record deliveries are planned for H2. As our analysis shows, Cohort screens well against UK defence peers on earnings growth, forecast margin improvement and (now) valuation. With the subdued shares, Cohort is trading on a CY26E PE of 15.2x vs. a recent (3-year forward) average of 18.7x, a peak of c. 27x earlier this year, and the UK defence sector forward average of 19x. We believe Cohort is oversold.
Sonar site visit: ELAC, in the Sensors & Effectors division, is a market leader in sonar systems, underwater communications and multibeam echo sounders, supplying the naval market. The products are renowned for their reliability and IP, developed and made in Kiel, Germany. Since the acquisition in late 2020, its revenue has quadrupled. We last visited in 2023 (The Hunt for Blue October) and return impressed. The new facility provides more capacity, efficiency, better testing and enhanced security. It cost €24m over 2 years and could more than double ELAC’s revenue over the next 5 years. Key takeaways: Aside from the advantageous new facility, we saw the finished hardware for the first of four boats ready for its acceptance testing. Successful completion of this milestone will mark an important reduction in the programme risk and will allow margins to rise. Adjacent simulation software is challenging but MASS can assist. Sphere, developed over the last five years, advances surveillance, communication and mine/collision avoidance. It is modular and cost effective, improving chances on the next surface and submarine sonar projects, representing a c.€500m pipeline. Furthermore, new products to detect & destroy UUVs provide exciting potential. There are very few ways for investors to gain exposure to this. Buy, TP 1750p: The shares trade on a 44% discount to EU defence peers. We view the recent sector downdraft on shaky Ukraine peace talks as a buying opportunity. As Russia and China test allied commitment via ‘Grey zone’ provocations, we expect rearmament by European and Asian allies afraid of US abandonment to drive strong demand. Interims were in-line and the read-across from recent TKMS & Rheinmetall CMDs is very supportive.
H1 progress: Revenue grew 9% to £129m, driven by the Communications & Intelligence division. Adj EBIT was, as expected, marginally lower at £9.7m (-4%), implying a 72% H2 bias on unchanged estimates, which compares to the 5yr average of 74%. Order intake of £122m represented 0.9x revenue and 94% FY cover, which has since risen to 96%. The interim dividend is increased by 10% to 5.8p. Net debt of £32.5m, in-line with prior guidance, reflected planned capex and w/c build ahead of record planned deliveries. Divisional summary: Communications and Intelligence delivered a 23% increase in adj EBIT on a 13% increase in revenue, a margin of 16.8% up 130bps. This included a strong maiden contribution from EM Solutions and stronger performances at MASS and EID.Order intake was good at MASS, especially Electronic Warfare Operational Support. The Sensors and Effectors division’s net margin of 4.8% (2024: 8.3%) reflects the expected higher levels of low margin deliveries on ELAC’s Italian sonar programme, the sale of SEA’s Transport business, with improved performance at Chess. Outlook: The closing order book was £605m (vs. £616m at H1‘24) and the pipeline remains very strong (see p3). FY cover stands at 96%. FY expectations for earnings growth and closing net funds are unchanged. Management continues to see a positive outlook for organic growth in the coming years underpinned by healthy demand in core defence markets. Estimates unchanged: FY26E/27E/28E sales of £290m/ £315m/ £340m, adj EBIT of £35.0m/ £41.6m/ £47.1m, adj EPS of 59.0p/ 66.5p/ 74.3p. Valuation: The shares trade on a CY26E P/E of 17.1x (44% below the EU peer average despite access to those markets and slightly higher margins), EV/EBITDA of 9.7x, FCF yield of 4.7% and DPS yield of 1.8%. Buy.
For the six months to 31 October 2025 Cohort reported revenue of £128.8m, +9%YoY and (adj.) operating profit of £9.7m (H1 25: £10.1m). Order intake was £122.3m (H1 25: £139.2m) with a closing order book of £604.5m (FY25: £616.4m). EPS (rptd., dil.) was 15.85p (H1 25: 19.76p) with an interim dividend +10%YoY to 5.80p/share. Communications & Intelligence (C&I) (EID, MASS, MCL and EMS) reported revenue of £62.3m, +12.8%YoY and (adj.) EBIT of £10.4m, +23.2%YoY, on margin improvement from 15.5% in H1 25 to 16.8%. The closing order book was firm at £203.6m (FY25: £202.4m). Sensors & Effectors (S&E) (Chess Dynamics, ELAC Sonar and SEA) recorded revenue of £66.6m, +3.7%YoY and (adj.) EBIT of £3.2m, -39.8%YoY, a 4.8% margin (H1 25: 8.3%.) due to an increase in lower margin projects. Order intake of £58.8m and project completion resulted in a closing order book of £400.9m (FY25: £414.0m); the Group reports a “strong” pipeline of opportunities. Deliverables in H2’26 are seen at c.£145m and after adding H1 income that equates to 94% of consensus forecast full year revenue. Our outlook and Fair Value of 1,930p / share remain unchanged.
MASS contract win MASS has been awarded a four-year contract, valued at £15.7m, to provide airborne countermeasures and associated services to a UK defence prime contractor for an international end customer. Our view No changes to our estimates but the news highlights a strong niche position, in countermeasures development and the spectrum warfare sector. Growth from this high-margin subsidiary has been subdued of late and so this news is particularly encouraging. It also marks a positive start for the new MD, who joined from L3 Harris earlier this year. Prospects remain strong. We suspect meaningful upside from counter-drone systems and naval communications. Recent trading update The AGM update, on 25 September, reaffirmed FY expectations. The order book provides nearly 90% FY revenue cover in month five, like last year. Prospects for significant orders remain strong. Valuation: The shares are on a CY26 P/E of 21.8x, falling to 19.5x in CY27E, and EV/EBITDA of 12.6x, falling to 11.0x.
In today’s AGM statement, Cohort noted the strength of record FY25 performance and expectations for growth in FY26 remaining, with the usual seasonal H2 weighting. Following contract wins since the start of FY2026 of over £60m, the order book on 20 September 2025 stood at over £590m, giving revenue cover of consensus FY26 estimated revenue of nearly 90%. Q1 saw a strong contribution from EM Solutions that was offset by reduced activity at MCL, the latter having enjoyed notably strong levels last year. There was also a weaker mix at both ELAC and SEA (which includes the sale of the latter’s transport business in May 2025). The combination of planned capital expenditure, including the completion of ELAC SONAR’s new facility in Kiel and the unwinding of the strong year-end working capital position, primarily customer advances, indicates net debt of c. £30m at the half year. Yet the Group expects to close FY2026 with net funds “in the range of £10m to £15m as previously reported”. Cohort also reported that: “Geopolitical tensions are driving increased investment in defence’’ and that it remains “optimistic for prospects for further significant new orders.’’ We are pleased to maintain our fair value at 1930p/share.
FY outlook: Expectations for growth in FY26 are unchanged and, in line with previous years, with a weighting to H2. Trading in H1 is expected to be slightly behind the strong comparative period. In Q1, a strong maiden contribution from EM Solutions was offset by a reduction in MCL’s activity, which was at a record level last year, and a weaker mix at both ELAC and SEA including the sale of the latter’s transport business in May 2025. Strong balance sheet: As previously flagged, given capex in Kiel in H1 and the unwinding of the strong year end working capital position, primarily customer advances, H1 net debt of c.£30m is expected. Management continues to expect to close FY26 with net funds of £10m to £15m, providing firepower for further acquisitions, where their track record is strong. Order book: Following contract wins of >£60m since the start of FY26, the order book on 20 September stood at >£590m, representing FY cover of nearly 90%. Optimism for significant orders is rising, particularly post DSEI. Our view: The order book and pipeline look healthy. We are encouraged by the strong start at EMS and to see Andy Smith (ex-Leonardo) has taken over as MD at CHESS. His production experience can help execute on a significant European pipeline with Rheinmetall air defence systems (recent press reports suggest Germany plans to buy 500+ Skyranger 30 Systems). Given recent NATO airspace incursions, this opportunity could be closer. Shares are on a forward P/E of 22.9x, falling to 20.3x in FY27E, and EV/EBITDA of 13.7x, falling to 11.6x. The CY26 P/E offers a 39% discount to the EU peer average of 35x. We reiterate our SoTP-based TP of 1750p, Buy. Next scheduled event: Interim results in December (date tbc).
For the year to 30 April 2025 Cohort reported record revenue of £270.0m, +33%YoY, record (adj.) EBIT of £27.5m, 10.2% margin, and a new high closing order book of £616.4m. Underlying order intake (i.e. excluding acquisition-related) grew 11%YoY, with the closing order book underpinning 79% of FY26 revenue. EPS (adj., basic) rose 27%YoY to 54.4p, with dividend per share up 10%YoY to 16.3p. Cohort's expertise and market reach is attenuated to three major defence drivers: the ongoing backdrop of multiple stimuli to defence measures from instability, conflicts and geo-political tensions in Europe (Ukraine), the Middle East (Israel, Gaza, Iran) and Asia-Pacific (Sino-US and Australia; the trend towards materially increased spend on defence as a percentage of GDP by NATO member countries in particular. The Group indicates that FY26 EPS should be above prior expectations – we have raised our outlook from 56.8p to 60.1p (adj. dil.) - is confident of c.10% earnings growth and a target of a “low to mid-teens” (adj.) EBIT margin (ED FY27 estimate 13.0%). The combination of accelerated earnings momentum, order book visibility and the opportunities evident in the UK Strategic Defence Review mean that we raise our Fair Value to 1930p / share:
FY25 summary: Prelims show a performance ahead of expectations with revenue of £270m (33% increase), adj. EBIT of £27.5m (30% increase & 10.2% margin), and adj. EPS of 54.4p. These compare to our estimates of £241m, £27.3m (11.3% margin), and 46.6p. Adj. EPS was 14.7% above our estimate due to lower interest (£0.5m vs. £1.5m) and tax (13% ETR vs. 21%) and a 1% adj. EBIT beat. C&I outperformed S&E. Strong cash generation took net funds to £5.3m. DPS rises by 10% vs. expectation of 5%. FY26 outlook: Significant opportunities are arising from the UK Strategic Defence Review and the outlook for organic growth remains positive. The closing order book grew by 19% to a record of £616.4m with deliveries extending out to the mid-2030s, and FY25 cover currently stands at 85%. Estimates: We update FY26E adj. EBIT by -3% to £35m to account for the Transport disposal, but increase adj. EPS (FD) by 4% to 59.0p on lower interest and tax assumptions. We also increase DPS by 10%. Our FY27E adj. EPS marginally increases, and we introduce FY28E. Our net cash estimate in FY25E is unchanged at £15m (top end of guidance). Our view & valuation: This defence technology company appears well positioned to capitalise on rising budgets amid tensions in Europe and the Asia-Pacific. Management remains prudent. The outlook and our estimates assume pre-Ukraine normality for MCL, which we estimate contributed >15% of FY25A adj. EBIT. This provides upside should conflict continue, alongside improvement in Chess execution and SEA mix. MASS should benefit from a recovery in National Security spending and EMS is driving higher margins. We will visit ELAC later this year. A CY26E P/E of 24.4x is a 25% discount to EU peers on 32.5x. SoTP based TP 1750p (from 1730p), Buy.
Cohort^ (CHRT, Buy at 1,540p) - FY results, upgrades
Cohort^ (CHRT, Buy at 1,476p) - Travelling, arriving, the journey continues
In a Trading Update for the year to 30 April 2025, Cohort reports strong growth and a record closing order book of £615m, materially surpassing the previous record of £518.7m. The Group expects FY25 performance in line with market expectations, underpinned by strength in the Communications & Intelligence (C&I) division, whilst Sensors & Effectors (S&E) performance was broadly comparable to FY24. Order intake was c.£285m (1.1x revenue) and excludes an additional £80m of orders acquired with EM Solutions; the comparable FY24 figure of £387m which included the single Royal Navy order for £135m, which if excluded indicates 12%YoY growth. Closing net funds stood at £5m, ahead of Group expectations following the acquisition of EM Solutions for £75m. The recent disposal of the transport operations of SEA will reduce the non-defence component of revenue to only 3%. The Group reports continuing demand for its products and services, notably in light of the ongoing conflict in Eastern Europe and tensions in Indo-Pacific, whilst also awaiting the imminent outcome of the UK’s Strategic Defence Review. The addition of EM Solutions also aligns with defence initiatives in Australia and Indo-Pacific, backed by the AUKUS strategic alliance. Whilst noting the strength of the share price, our outlook is unchanged for now. FY25 reporting in July will provide the opportunity to both review forecasts and reassess our Fair Value calculation.
Cohort^ (CHRT, Buy at 1,550p) - FY trading update
Record trading performance. Revenue and profit are in line with expectations (Cons: £245m revenue, £27.6m adj. operating profit and 46.1p adj. EPS). Divisionally, Communications and Intelligence reported solid growth and an improved margin of 150bps, to 17%, while Sensors and Effectors delivered a broadly flat performance. Net margin declined by 20bps yoy, to 10.2%, driven by weaker margin mix at SEA and delays / one-off project costs at Chess, which implies higher-than-expected Group revenue. The group delivered a record closing order book of c.£615m, versus £518.7m the prior year. This underpins c.80% or £230m of revenue for FY26E. Net funds were ahead of expectations at more than £5m (INVe £7.5m); the balance sheet is in a strong position. Transport division disposal. Cohort has disposed of the non-core Transport division, part of SEA, for a total consideration of c£8m. This is in line with the group’s strategy to focus on defence and security. The deal is set to complete in June/July and not expected to impact FY26 adj. EPS. Non-defence revenues now represent just 3% of revenue. Outlook: Increasing defence budgets underpin demand for Cohort’s products and services. Over 80% of FY26E revenue is covered by the current order book and confidence is instilled through visibility extending into the mid-2030s. Furthermore, there is strong pipeline of order opportunities bolstered by the additional opportunities that EMS represents. Valuation: Shares trade on 27.2x FY26E P/E, 15.2x EV/EBITDA falling to 23.2x and 13.3x respectively in FY27E, with a FCF yield of 4.3% in FY26E. Next catalyst: Preliminary results are scheduled to be published on 16 July.
Cohort^ (CHRT, Buy at 1,020p) - Site visit to SEA
Fourth boat German subsidiary ELAC has been awarded a contract amendment worth €16.4m following activation of the contractual option for an additional unit. ELAC will deliver the sonar system for an additional unit of a new build submarine program for the Italian Navy. It brings the total value, first awarded in 2021, to over €100m for four submarines. Enhances visibility No change to estimates (the fourth vessel is due for delivery in 2032), but this award enhances future revenue visibility and again highlights ELAC as a leader in its area. Management believe that ELAC’s Sphere™ digital hydroacoustic technology provides the most advanced and effective sonars available worldwide, enabling a generational leap in underwater battlespace performance. ELAC benefits from being close to the German Naval HQ, the NATO Confined & Shallow Water CoE and Kiel University. Overall, Cohort is well placed to benefit from a decade of elevated Naval spending by European and Asian customers. There are few ways for investors to gain exposure to this. As a reminder of H1 progress, it was announced last month that Adj EBIT increased 69% to £10.1m, implying a 59% H2 bias on estimates pre the EMS acquisition, which compared to 72% last year. Order intake grew 17% to £139m, driven by the Communications and Intelligence division and represented 1.2x revenue. The order book stood at £541m, from which H2 revenue cover is 99%.
Cohort^ (CHRT, Buy at 1,020p) - Interim results; record performance
For the six months to 31 October 2024 Cohort reported revenue (adj.) operating profit and net funds ahead of recent guidance: revenue +25%YoY at £118.2m, (adj.) EBIT +69%YoY to £10.1m and net funds at 31 October of £37.9m. Order intake of £139.2m compared to £119.1m a year earlier, with a record closing order book of £541.1m. EPS (adj., dil.) was 19.8p (H1 24: 10.3p) and the interim dividend was raised by 12%YoY to 5.25p/share. Communications & Intelligence delivered revenue of £55.2m, +26%YoY and (adj.) EBIT of £8.5m, +41%YoY, a 15.4% margin compared to 13.7% a year earlier; the order book increased from £108.8m in April to £134.4m. Sensors & Effectors posted revenue of £64.2m, +26%YoY and (adj.) EBIT of £5.3m, +1.3x, an 8.3% margin compared to 4.5% in H1 24. Its closing order book was £406.8m (April, £410.7m) with H2 order intake expected to exceed revenue. Post period-end, Cohort announced a conditional sale and purchase agreement to acquire Australian satellite communications specialist EM Solutions (Europe) B.V., for an enterprise value of c.£75.0m. The acquisition will take the Group pro forma order book to above £650m. Recent events in Syria, the ongoing conflicts in Israel the Ukraine, and with persisting tension in the Far East / Asia Pacific region, serve as reminders of the importance to the UK of retaining an efficient and modernised defence capability. We retain our Fair value / share of 1090p. That price is indicative of a FY26E PE of 19.0x compared to a peer group market cap weighted average of 22.2x, and EV/EBITDA of 10.1x, compared to 12.5x.
H1 progress: Revenue grew 25% to £118m, driven by higher UK MOD sales within both divisions. Adj EBIT increased 69% to £10.1m, implying a 59% H2 bias on estimates pre the EMS acquisition, which compares to 72% last year. Order intake grew 17% to £139m, driven by the Communications and Intelligence division, and represented 1.2x revenue. The interim dividend is increased by >10% to 5.25p. Net funds of £37.9m (FY24: £23.1m) were well ahead of expectations due to w/c flows that included customer advances. Outlook: Demand continues to be driven by international tensions in the Asia-Pacific region and Europe. The order book stood at £541m, from which H2 revenue cover is 99%. In line with previous experience, management anticipate a stronger performance in H2 and remain on track to achieve FY expectations, albeit implying weaker revenue mix with risk to the upside. Estimate changes: We upgrade our FY25E/26E/27E net funds materially to –£7.5m/+£15.1m/+£32.6m from -£15.0m/+£9.3m/+£29.2m on better w/c assumptions and upgrade FY25E adj EPS by 3.4% to 46.6p on lower interest. Acquisition recap: The EM Solutions acquisition, due to complete shortly and ‘in estimates’, has been well received by all stakeholders. It is a high margin, fast growing Australia-based producer of satellite communication terminals being acquired for £74m, an attractive price of 10.3x CY24E EBIT, part funded by a successful £41m fundraise last month. The transaction is materially earnings enhancing and makes strong strategic sense in our view. Valuation: The shares trade on a CY25E P/E of 19.3x, falling to 16.4x in CY26E. The balance sheet post the EM Solutions acquisition continues to provide significant optionality. We roll forward our 12m SOTP-based valuation to CY26E and increase our TP to 1275p (from 1200p). Buy re-iterated.
Cohort^ (CHRT, Buy at 1,080p) - Communications acquisition: positive message
Cohort has announced a conditional sale and purchase agreement to acquire EM Solutions Pty Ltd from Electro Optic Systems Holdings Ltd, for an enterprise value of AUS$144.0m, c.£75.0m This is Cohort’s largest acquisition to date. The purchase will be funded from Group cash resources, debt facility plus a share placing, and is expected to be EPS-accretive from FY25/26. EM Solutions offers a range of satellite-based secure communications systems including satellite on-the-move (SOTM) and radio frequency (RF) systems, plus contract manufacturing and design. For Cohort it adds complementary expertise in satellite communications for global naval and defence applications. We estimate that the acquisition enhances Cohort FY25 revenue by 4% (pro rata for 151 days remaining) and in FY26 by 17%, with an uplift to (adj.) EBIT of 10% and 32% respectively. Our Fair Value is raised to 1090p/share, indicative of a FY26 E PE of 19.4x and EV/EBITDA of 10.1x. This compares favourably to a market cap weighted average for Cohort’s peer group of: PE, 21.3x and EV/EBITDA of 12.1x
Acquisition summary: EM Solutions (EMS) is being acquired for AUD$144m to access the fast-growing Naval satellite communications market. CY24E revenue of AUD$55m and a 25.5% operating margin implies a purchase multiple of 10.3x CY24E EBIT. It will operate as the seventh business within Cohort, reporting through Communications and Intelligence. Completion is expected by end December. Australian FIRB approval has been received. It will be Cohort’s largest acquisition to date. Rationale: The business brings a new military communications capability with strong IP, known for precise tracking in tough sea states. Revenue is expected to almost double over the next 3 years given its strong backlog, servicing and growing market. Furthermore, it bolsters Cohort’s foothold in Australia and EMS’s position in Europe. CY23 revenue was split 46% Australia, 49% Europe and 5% RoW. EMS has a strong order book, a larger pipeline, and is known by Cohort having worked with subsidiary EID. It is being acquired from Australian listed EOS (N/R), which is heavily indebted. Trading update: Cohort current trading is slightly ahead of expectations. For H125, the Board expects revenue +11%, adj. profit +50% to at least £9m, which reduces the H2 weighting, and net cash of c.£30m. Estimate changes: We upgrade FY25/26/27E adj EPS by 0.8%/20.0%/22.1% to 45.0p/56.6p/66.1p. No synergies are assumed. We believe risk remains to the upside. We forecast FY25E net debt of £15m, returning to net cash of £9.3m and £29.2m in FY26E and FY27E. Our view: This acquisition, carefully selected by an experienced team, not only enhances Cohort’s earnings, margin and prospects at a reasonable price but also its strategic value. Our 12m TP rises to 1200p, BUY.
Cohort^ (CHRT, Buy at 868p) - Investor trip - 31 October
In a statement to accompany today’s AGM, Cohort reported that, propelled by trading and order intake, notably in the Sensors & Effectors division, H1 25 is expected to be significantly ahead year-on-year, with net margin improvement. The Group indicates that FY25 revenue and (adj.) operating profit are now expected to be slightly ahead of management prior expectations. The year-end record closing order book was £518.7m, with visibility out to 2037 and an estimated 90% of FY25 consensus estimated revenue covered. Post FY24 results the Group has continued to add contract wins worth over £120m taking the total to £575m by 20 September. We have revised our FY25 revenue estimate up by 4.5%, from £220m to £230m, also raising (adj.) EBIT by 2.2% to £24.6m (prior £24.0m). Cohort currently trades on 9.6x FY26E (adj.) EV/EBITDA, 17.6x PE compared to the market cap weighted average of peers on respective multiples of 12.1x and 21.1x At this stage, our Fair Value remains 910p / share
Strong progress in H1: Following strong activity last year, momentum has continued. The start to FY25 has been encouraging with contract wins of over £120m, including a recent £25m contract award for air defence tracking systems. FY25 cover stands at >90% of revenue. The order book on 20 September stood at >£575m, driven by Sensors and Effectors. This compares to £519m at y/e and stretches out to 2037. H1 performance is expected to be significantly ahead y-o-y, albeit with a continued H2 bias. FY25 outlook: Management now guide revenue and profit will be a little ahead of prior expectations and are optimistic about prospects from both domestic and export customers. With net funds, the Group is well positioned to grow organically and via carefully targeted acquisitions. Estimates: We upgrade FY25E adj. EPS by 3% to 45p, driven by higher Communications and Intelligence revenue as we understand MCL has been busier than expected. This mix drives a slightly lower margin. Given a strong H1, we estimate a c.66% H2 EBIT bias vs. 72% last year. We upgrade FY25E net cash from £15m to £20m, driven by better working capital assumptions in SEA and EID. Our outer year estimates are unchanged at this stage. Our view: Momentum continues and the potential for further progress remains strong. We believe the Group is capable of mid-teen margins by FY27, implying >25% upside to existing assumptions, largely driven by EID orders positively inflecting and export orders for SEA naval systems, MCL counter drone systems and CHESS ground-based air defence. The shares are on a CY25E EV/EBITDA of 9.4x, which compares to the NTM 5-year average of 10.1x, and looks attractive for improved prospects. Next scheduled event: Interim results in December.
Cohort^ (CHRT, Buy at 826p) - AGM update - defence momentum continues
Contract summary: Subsidiary Chess Dynamics has been awarded three contracts by Rheinmetall Air Defence, totalling more than £25m. Chess will provide for Air Defence systems including electro-optical tracking surveillance systems and multi-sensor units. Work will commence immediately, and deliveries will continue out to 2028. This further underpins the order book and enhances visibility of future revenues. Estimates / Our view: No change to estimates but the win provides a strong underpin, raising FY25 order cover to 98%. As the work is based on an existing product range, we assume margins are appropriate. Rheinmetall is one of the world's foremost makers of advanced air defence systems. For a demonstration video, click here. The customer emphasises the requirements imposed on short-range air defence have become far more complex in recent years. The threat to military and civil infrastructure continues to mutate and multiply. The focus is now on faster and more agile uncrewed air vehicles and precision guided munitions; only the most sophisticated systems can stop these and so it is very encouraging to see Chess selected to improve system capability. We believe demand has ample scope to grow and this news supports our confidence in outer year upside potential. We consider the Group capable of mid-teen margins by FY ending April’27, which implies >25% upside to existing assumptions. Valuation / Next event: The shares are on a FY25E P/E of 18.9x and EVEBITDA of 10.6x, falling to 17.3x and 9.4x in FY26E. BUY and 980p TP re-iterated. The next scheduled event is an AGM update on 24 Sept.
Cohort reported strong FY24 results, with revenue +11%YoY at £202.5m, which was 8% above our outlook, and (adj.) operating profit of £21.1m +11%YoY (3% above EDE). The closing order book was £518.7m +58%YoY with order intake of £392.1m, +78%YoY, and estimated 95% coverage of our FY25 revenue outlook. The year closed with net cash of £23.1m. National security and spending on defence became an issue of top priority through the course of pre-election campaigning, with the Labour Government indicating that it would increase spending to 2.5% of GDP compared an estimated 2.30% in 2023/24. The Group reports good demand from both domestic customers and for exports, noting increased attention to defence spending spurred by conflict in Ukraine and ongoing tension in the Indo-Pacific region. Our read-across to the market cap-weighted average of peers leads us to raise our Fair Value / share to 910p from 725p.
Cohort^ (CHRT, Buy at 826p) - Strong results and positive outlook
FY24 summary: Prelims show performance ahead of expectations with revenue of £203m (11% increase), adj. EBIT of £21.1m (11% increase & 10.4% margin), and adj. EPS of 42.9p. These compare to our estimates of £187m, £20.6m (11.0% margin), and 36.5p. Adj. EPS was 17.5% above our estimate due to lower tax than assumed overseas (Germany & Portugal) and a 2% adj. EBIT beat. Strong cash generation took net funds to £23.1m. DPS, which has increased every year since IPO in 2006, rises by 10%. FY25 outlook: Order intake grew 78%, the closing order book grew by 58%, and current FY25 cover now stands at 95%, including recent wins. The start to 2024/25 has been encouraging. Management expects another year of good growth in-line with expectations, enhanced by the £3m acquisition of ITS, which produces manuals for armoured vehicles. Given planned capex and expansion in working capital, net funds are likely to decrease. Estimates: We increase FY25E/26E adj. EBIT by 5%/6% to £24m/£27m, adj. EPS by 3%/4% to 43.7p/47.8p and introduce FY27E. Our net cash estimate in FY25E is unchanged at £15m, but improves by 7.5% to £23m in FY26E. Our view & valuation: Momentum continues and the potential for further significant progress remains strong. We believe the Group is capable of mid-teen margins by FYApril’27, implying >25% upside to existing assumptions, largely driven by EID orders positively inflecting and export orders for SEA naval systems and CHESS ground-based air defence. The shares are on a CY25E EV/EBITDA of 9.0x, which compares to the NTM 5-year averages of 10.1x. Our TP rises to 980p from 850p, reflecting improving prospects, balance sheet strength, and scarcity value.
Cohort^ (CHRT, Buy at 810p) - Contract award
Cohort plc SDX Energy PLC
In an Update for the year to 30 April 2024 Cohort reports overall performance slightly ahead of market expectations. We note that the Group reports very strong order intake of c.£387m (compared to £218m in FY23) resulting in a closing order book which stood at c.£518m (FY23: £329.1m), inclusive of the March SEA Royal Navy £135m Ancilia contract. The group notes strong H2 performance, with overall growth in the Sensors & Effectors division, notably Chess and SEA, outpacing the Communications & Intelligence division where, as expected, UK MOD orders decreased from the 2022/23 peak, and Portugal continued to experience some contract delays. Cohort reports good demand from both domestic customers and for exports, noting increased attention to defence spending spurred by conflict in Ukraine and the Middle East, and ongoing tension in the Indo-Pacific region. The order book now covers c.£180m, i.e. 90%, FY 25 revenue market expectations (FY24 was 84% covered at £145m). We see the momentum established in FY24 continuing into FY25. At this stage we maintain our outlook to FY25 and a Fair Value of 725p / share.
Cohort^ (CHRT, Buy at 808p) - FY trading update, strong performance continues
Record trading performance. Revenue and profit growth for FY23/24 is modestly ahead of expectations driven by a strong demand in H2, the group delivered a record closing order book of £518m compared to £329.1m in FY22/23, and net funds of c£23m were ahead of expectations. Divisionally, Sensors and Effectors delivered growth across all of its businesses, most notably within Chess and SEA (see detailed note on SEA’s £135m Royal Navy contract), which de-risks outer year forecasts, while the Communications and Intelligence division was challenged by contract delays within Portugal and reduced orders from UK MoD. Record order book. The order book exceeds £500m for the first time, with visibility extending to 2037 underpinning our confidence in our outer year forecasts. Order intake of £387m or 1.9x for FY23/24 compared to 1.2x in FY22/23, implies an increase of 80% y-o-y. £180m of the order book deliverable in FY24/25 underpins 90% of our FY25E revenue expectations. Outlook. Demand for Cohort’s products and services has increased globally underpinned by increased investment in defence budgets. With 90% of FY25E revenue covered with the current order book, a strong pipeline of order opportunities and visibility extending to 2027 following the £135m contract awarded to SEA from the Royal Navy, we are confident in the long-term prospects of the group. Valuation. Shares trade on 19x FY25E P/E and 11.2x EV/EBITDA falling to 17.5x and 10.3x respectively in FY26E, with a FCF yield of 3.4% and dividend yield of 1.9% in FY25E. Next catalyst. Full year 2023/2024 will be published in late July.
Sit rep - April 2024 - UK defense placed on "war footing"
We caught up with management at the Undersea Defence Technology exhibition yesterday. Three subsidiaries were on show (SEA, ELAC and EID) and with whom we discussed specific exposure. A common theme when discussing the future among exhibitors was modularity and miniaturisation, also for increasingly uncrewed vessels. It was therefore the KraitArray system that caught most of our attention. Towed by crewed or uncrewed vessels or used statically for harbour protection, this has been developed by SEA over the last 10 years and is gaining interest from customers worldwide as a lighter and cheaper alternative to existing systems by the likes of Thales. This, combined with the recent £135m contract for Ancilia Naval countermeasure system (advanced decoy launcher), provides an encouraging outlook for this business and we look forward to hearing more about prospects when we visit SEA with investors later this month. The Portuguese team from EID are now optimistic following a challenging period and ELAC in Germany have strong visibility via the Italian submarine programme (see our 'Hunt for Blue October' note for more detail). Valuation The shares trade on a FY25 (April y/e) P/E of 17.2x and EV/EBITDA of 10.1x and DPS yield of 2.1%, which in our view remains attractive for exposure to growing areas of defence spending. Next event The company is hosting an investor visit to SEA in Devon on 30th April – please contact us if you would like to attend.
Sit Rep - Mar 24 - Putin extends his reign over Russia
Cohort^ (CHRT, Buy at 686p) - Contract win, >30% valuation upgrade
Cohort plc Next plc
Cohort announces that its subsidiary SEA (Systems Engineering and Assessment Ltd.) has been awarded a major contract by the UK’s Ministry of Defence to provide Electronic Warfare Counter Measures (Increment 1a) (EWCM 1a) to the Royal Navy with a total value of at least £135m. This includes provision and support of SEA’s Trainable Decoy Launcher System, Ancilia. At the FY 24 interim results Cohort had commented on an overall “increased tempo” of order intake. The Group reported a closing order book of £354m: we note that this latest contract takes the closing order book above the £0.5bn mark at £513.6m. We have raised our FY25 revenue outlook by 2.5% (£5.0m). Thereafter we estimate a contribution from the SEA EWCM contract of c.£15.0m annually. Our FY25 E (adj.) EBITDA estimate is raised by £2.0m, +10%, with an estimated subsequent incremental annual c.£5.0m contribution. Our FY25 EPS outlook is raised from 36.7p to 41.8p. Accordingly, and in the light of additional recent contract wins (e.g. the 19 March Chess Australian Navy contract) our Fair Value is raised to 725p.
Cohort^ (CHRT, Buy at 594p) - Significant contract win for SEA
Contract win details. Having competed against Elbit Systems and Safran Technology to provide Electronic Warfare Countermeasures Increment 1a to the Royal Navy, SEA’s Ancilia has won, resulting in a considerable multi-year contract (to 2033/2034) from the UK MoD worth at least £135m (with option value, details of which are classified). This contract win builds on SEA’s long-standing relationship with the Royal Navy and further validates its technology. What is SEA’s Ancilia? Developed in collaboration with Chess Dynamics, Ancilia is a trainable decoy launcher system that enhances fleet protection by rapidly responding to incoming air, surface and subsurface threats. It is compact, lightweight, modular and can be retrofitted onto existing platforms. It’s named after the 12 shields kept in the Temple of Mars in ancient Rome. With the increasing threat of new missile technology, demand for naval and ground-based air defence is accelerating and SEA and Chess’s product portfolios are positioned to benefit. Management estimates the international TAM for Ancilia alone, to be at least £250m in the next 5 years. Record order book. The order book now exceeds £500m versus £354m at 1H24 (FY cover of 95%); with visibility to 2033/34, confidence is underpinned. Upgraded forecasts. We update our forecasts to reflect recent contract wins, increasing our estimates for revenue, operating profit, EPS and net funds in both FY25E and FY26E (details overleaf). Margins rise from 11% to 12% by FY26E laying foundations to achieve mid-teen targets medium term. Valuation. The shares trade on 8.1x FY25E EV/EBITDA and 14.1x P/E. Our TP rises to 850p to reflect the upgrade in Sensors & Effectors’ outlook. Next catalysts. SEA site visit on 30 April and FY trading update in May.
Sea Eagle win Subsidiary Chess Dynamics has been awarded a £15.7m contract by BAE Systems to supply its Sea Eagle surveillance systems for the Royal Australian Navy's Hunter class frigates. Sea Eagle is a stabilised electro optical fire control system optimised for the control of naval guns against air, surface and shore targets. Capable of controlling any ‘in-service’ naval gun, the system provides 24-hour detection, acquisition, tracking, identification and engagement of air and surface targets. Estimates / Our view Work will begin immediately and continue until 2031. This helps underpin our estimates and enhances visibility. We see further opportunities for Cohort via rising demand for Naval and ground-based air defence, with subsidiaries Chess and SEA looking well positioned. Lead indicators / customer order books are encouraging. This Sea Eagle order highlights further momentum. FY order cover at H1 results in December stood strong at 95%. The shares trade on a forward P/E (April y/e) of 16.4x, falling to 15.6x next year, and EV/EBITDA of 9.4x falling to 8.9x. This is attractive for rising orders, positive margin trajectory and scarcity value in a shrunken listed defence sector. Next events: UDT show on 10 April, Site visit for investors to SEA in Devon on 30 April (please contact us if you would like to attend) and FY trading update in May.
Aerospace & Defence - Sit Rep - Feb 24 - Defence spending expected to increase
£15m contract win. SEA, part of the Sensors and Effectors division, has been awarded a £15.1m contract to supply Torpedo Launch Systems to the Royal Canadian Navy. Work will commence immediately and is expected to complete in 2030. No change to estimates but this further underpins the order book and enhances visibility. FY underpinned. FY order cover at H1 results in December stood at a healthy 95% and this order highlights further momentum within the SEA subsidiary. Its lightweight TLS is a rapid-reaction system capable of firing a variety of NATO standard lightweight torpedoes, an essential capability. As a reminder, another key highlight at H1 was news of former FD of BAE Systems, Peter Lynas, joining the Board as NED and Audit Chair designate this month. Valuation. The Group trades on a forward P/E of 15.1x, EV/EBITDA of 8.6x and DPS yield of 2.7%. Our 12m SOTP based valuation is unchanged and targets 740p, representing 37% FTR.
For the six months to 31 October 2023 Cohort reported revenue of £94.3m, +22%YoY, EBIT (adj.) of £6.0m, +20%YoY and (adj.) EPS of 10.36p (adj. dil., 10.33p). The closing order book further increased to £353.9m (FY23, £329.1m). With £90m of orders deliverable in H2 the Group reports that 95% of market consensus revenue outlook is covered, whilst the order book has longevity to 2033. The net cash position was £13.3m compared to £15.6m at year-end FY23 and H1 23 net debt of £0.6m boosted by operating cashflow of £10.3m (H1 23: £7.7m). The Group raised the Interim dividend by 10% to 4.70p/share, maintaining the track record of progressive returns. Cohort noted revenue growth in each division underpinned by UK MOD demand. Revenue in the Communications & Intelligence (C&I) division (EID, MASS and MCL) increased 32.3%YoY to £43.9m (46.3% of total). Revenue in the Sensors & Effectors (S&E) division (Chess Dynamics, ELAC Sonar and SEA) grew 14.7%YoY to £51.0m (53.7% of total). Overall, these results confirm the all-important upward trend in orders and contract awards which in turn underpin revenue growth and visibility from operations which span the major theatres of defence operations. These interim results continue the pattern of order-led demand for Cohort’s expertise and services, linking the bigger picture issues that focus on defence to Group prospects. Our Fair Value remains at 650p/share.
Initial Equity Trading Comments - 13 December 2023
CHRT NRR NFG NXT LP0 FDRVF
Cohort^ (CHRT, Buy at 534p) - H1 results, strong orders pay dividends
H1 progress: For the six months ended 31 October, the Group delivered adjusted operating profit of £6m, up 20% YoY on revenue up 22% to £94.3m. This implies a 71% H2 profit bias, in-line with last year. Increased revenue was driven by higher UK MOD sales within both divisions. Profit was driven by Communications and Intelligence, with performance in Sensors and Effectors slightly lower than last year. Adj. EPS was up only 2%, impacted by a higher tax rate and interest. Net funds of £13.3m is healthy. Outlook in-line: The record order book of £354m includes over £90m deliverable in H2, which covers over 95% of consensus forecast FY revenue. The FY outlook is unchanged, and management continue to see a positive outlook for organic growth in the medium term. The duration of the order book now extends to 2033. Since H1, the order book has grown to over £365m including the third boat for the Italian sonar project. Demand continues to be driven by tensions in the Asia-Pacific region and Europe. Importantly, the H2 order pipeline looks strong. There are opportunities with the Portuguese Navy, customers in Southeast Asia and Australasia, as well as comms and surveillance systems for customers in the UK and Europe. Estimates unchanged: We leave our estimates unchanged, acknowledging upside risk to our revenue estimate given progress in H1. We forecast FY24E adj. EBIT of £20.6m, adj. EPS of 36.5p and net funds of £10.3m. Valuation – TP 740p: Cohort continues to offer value in a shrunken sector. The shares trade on a FY24E P/E of 14.5x, EV/EBITDA of 8.3x, and DPS yield of 2.8%. We reiterate our BUY recommendation and 740p TP.
Initial Equity Trading Comments - 5 December 2023
CHRT IOM CML MARS DSCV SSPG OTB ENSI
Cohort^ (CHRT, Buy at 510p) - Contract win for ELAC Sonar, building the book
History & rationale: Cohort acquired ELAC from Wärtsilä in 2020 for just £14.2m. It is a market leader in sonar technology for surface ships and submarines. c50% of revenue is generated from EU customers and c50% from Asia. The Group acquired ELAC to take advantage of the strong submarine new build market, strong demand for sonar re-fit / upgrades, and to strengthen its presence in SE Asia and Europe. Cohort expects the Naval export market to APAC (ex-China) will total $150bn over the next 10 years. ELAC shares highly complementary expertise, capabilities and technologies with the SEA offering. Recent progress: ELAC’s experienced team has built on almost a century of hydro-acoustic knowledge to create capability that has displaced the likes of Atlas Elektronik (10x larger). Its sensors, transmitters and software must survive extraordinary ranges of temperature and pressure. It is currently working on a large Italian sonar project, at low margin through the development stage; production is to begin towards the end of this financial year. We also visited the construction site of a new facility costing €20m, expected to be operational in 2025, that will significantly enhance ELAC’s efficiency and capacity. Future opportunities include unmanned underwater vehicles. Group Q1 recap: FY24 cover stood at 93% of consensus revenue, from 90% at the beginning of the year. The order book rose >12% since y/e. Conservatively, FY guidance was unchanged. Prospects and the balance sheet are strong. Shares on a discount: The shares are trading on a CY24E EV/EBIT of 8.5x, a material discount compared to the 5-year average of 12.2x. Relative to the UK peer Group, Cohort trades on an 17% discount on CY24E estimates that assume a 12% operating margin, which is slightly higher than the peer average. BUY.
In a statement to accompany today’s AGM, Cohort PLC reported that, following a year of record earnings in FY23, the Group has continued to build its order book, adding a further £90m in contract wins since the start of FY24. Consequently, as of 22 September the order book had risen to £370m, representing revenue cover of 93%. Compared to a year-end FY23 net cash position of £15.6m, net funds at the end of August were £15.2m, providing sufficient cash in conjunction with banking facilities to both meet commitments and support a potential acquisition strategy. The Group reports that the increased level of activity with the UK MOD which characterised FY23 has continued, with strong momentum into the first quarter of FY24, backed by prospects for long-term orders for naval systems in particular and for support work for both the UK MOD and export markets. This update confirms that the Group has maintained momentum in new contract wins, and has built the financial flexibility to both furnish growth and consider opportunities to augment its portfolio of acquired, and integrated, defence specialists. Our positive outlook remains unchanged, as does our Fair Value at 650p/share.
Strong progress: An encouraging start to FY24 with contract wins of over £90m, including a recent £17.5m contract award to SEA. FY24 cover stands at a healthy 93% of consensus revenue, from 90% at the beginning of the year. The order book on 22 September stood at £370m vs £329.1m at y/e, up c.12.4%. Following strong UK MOD activity last year, momentum has continued in Q1, with a good pipeline of long-term order opportunities in naval systems and support work from the UK MOD and in export markets. Outlook: Management expectations are unchanged and FY guidance is consistent with our existing forecasts. Positive net funds expected at y/e FY24. Estimates unchanged: We forecast flat earnings this year to 36.5p, which may prove conservative, then a return to mid-single digit growth in FY25E based on the strong order pipeline and visibility. We estimate margin accretion in FY24E and FY25E, and net cash positions of £10.3m and £12.4m respectively. Deployable B/S: Net funds at the end of August stood at £15.2m vs £15.6m at y/e. The Group’s cash and readily available credit at Q1 provides significant headroom for current anticipated commitments and likely future acquisitions. Our view / valuation: We attended a very busy DSEI show two weeks ago. Trade sentiment is bullish. Cohort stands out as a long-term beneficiary with exceptional visibility. The balance sheet continues to provide optionality. The shares YTD have been relatively weak (almost flat), unjustified considering the fundamental performance and improved visibility. The shares are trading at 7.7x CY24E EV/EBITDA and 8.8x EV/EBIT, a material discount compared to the 5-yr averages of 10x and 12.2x, respectively. Next catalyst: Interim results in December.
Cohort^ (CHRT, Buy at 484p) - Contract win, extending the book
SEA wins another significant contract The Systems Engineering & Assessment (SEA) subsidiary, part of the Sensors and Effectors segment, has been awarded a 32-month contract to the value of £17.5m for a major defence programme. The contract is with a UK customer to provide a Communications System which further underpins the order book (FY23A £329m). Our view The encouraging contract win underpins our existing forecasts and enhances visibility – no change to Group estimates. The prelims in July signalled FY24 order cover at >90% of consensus revenue (vs. 85% INVe). This is another significant win for SEA (awarded a £26.2m contract in May) and enhances visibility on future revenues; FY24E-26E Group revenue of £187m - £201m and Sensors and Effectors segment revenue of £96.5m - £103.4m. Next catalyst: The DSEI show on 12th-15th September. Valuation The increasing threat of wider global conflict supports defence spending and is driving demand for Cohort’s niche products and services. The Group stands out as a long-term beneficiary with exceptional visibility. Cohort is attractively valued in the shrunken listed defence sector; the shares are trading at a discount on a FY24E P/E of 13.2x and EV/EBITDA of 7.5x compared to the NTM 5-year averages of 14x and 10x.
For the year to 30 April 2023, Cohort reported record revenue of £182.7m +33%YoY, matched by record (adj.) EBIT of £19.1m, +23%YoY. The closing order book of £329.1m (FY22: £291.0m) was also at a high, boosted by order intake of £220.9m; by June this had reached £360m. EPS rose 17%YoY to 36.48p/share, with the proposed total dividend of 13.4p/share +10%YoY. Notwithstanding a strategically firm defence outlook – based on the conflict in Ukraine, tensions in the South China Sea, and cohesion amongst NATO allies - coincident with results, the MOD published on 18th July the Defence Command Paper Refresh (DCP23). In addition to committing £2.5bn to defence stockpiles, the paper heralded a “New Alliance” between defence and industry. Overall, FY23 revenue was 10.7% above our outlook (£165.0m) and (adj.) EBITDA 5.5% above: we have now raised our FY24 revenue outlook by 7% to £188.1m and EBITDA (adj.) by 5% to £25.0m. The key driver for medium-term growth remains the healthy, and growing, order book: our Fair Value remains at 650p/share.
Cohort^ (CHRT, Buy at 485p) - Primed to
In a Trading Update for the year to 30 April 2023, Cohort plc expects performance to be slightly ahead of market expectations based on higher revenue. We note FY23 net funds reported at c.£15.0m - well ahead of ED estimated, at £4.6m - strong order intake of c.£218m (FY22: £186.7m), and a closing order book of £325m - at the Interim £304.2m. This underpins £145m, i.e. 83%, of our FY 24 estimated revenue, compared with 69% in FY23 (E). Overall, the update confirms the strength of momentum into the medium term with delivery projected to 2032. At the Interim we raised our FY23 revenue outlook by 3% to £165m (+20%YoY) and maintained our (adj.) EBITDA outlook of £22.0m (+13.1%YoY). At this stage, our outlook remains unchanged, with the opportunity to review with full FY 23 results, and which indicates a FY23 EV/EBITDA of 8.9x; and for FY24 (E) 8.2x. Our Fair Value remains at 650p/share.
Results summary: In FY23 the Group returned to growth with contributions from both segments. Trading performance was slightly above expectations. Order intake grew 17% y-on-y to c.£218m. The closing order book of >£325m provides exceptional visibility with deliveries out to 2032. The order book underpins 84% of consensus revenue for FY24 (c.78% of our new FY24E revenue estimate). Strong UK MOD demand offset weaker performance in Portugal, and weaker performance in EID negatively impacted margins in the Communications and Intelligence (C&I) segment. Chess performance improved; the Italian Submarine programme for ELAC Sonar supported growth, but margins remained low whilst in the design phase. Overall, strong growth was seen across the Sensors and Effectors (S&E) segment. FY24 Outlook: Expectations maintained. Growth expected in S&E driven by Chess and increased deliveries of Naval systems. C&I is expected to trade in-line with FY22/23 as EID’s performance is expected to be offset with UK MOD sales dropping back to normalised levels. Estimate changes: We increase FY23E/24E/25E revenue by 9%/6%/6%, but take a conservative view on operating margins. We upgrade our FY23E net cash position by £9.7m to £15m, from £5.3m, and upgrade FY24E/25E by £1.9m. Our view: Rising geopolitical tensions are driving demand for Cohort’s secure communications and sensor technology, and there is outer year upside risk. The balance sheet continues to provide M&A optionality (net funds of c.£15m). Valuation: Cohort offers good value in the shrunken listed defence sector. On CY23E, the shares are trading on an EV/EBITDA of 7.9x, below the 5-year average of 10x, and at a discount of c.20% to the average of UK defence peers. Our SoTP-derived 12m TP is unchanged at 700p, implying >40% upside.
Contract win for export customer valued at £26.2m The Systems Engineering & Assessment (SEA) subsidiary has been awarded a £26.2m contract by an overseas Ministry of Defence, for phase two of a communications systems upgrade on two naval surface vessels. The work will commence in May 2023, and be completed by the end of 2026. Our view No change to Group estimates. This contract is for the second of four planned project phases and compares to FY23E-25E revenue for SEA of £35m£38m/pa. Together with other recent wins across the Group, management signal that this contract further underpins the order book (£304m at H1) and enhances the visibility of future revenue. Next catalyst is an FY update at the end of this month. Valuation The shares are now trading on an FY23 P/E of 13.3x and an EV/EBITDA of 8.1x, both below the forward year 10-year average (P/E 14x and EV/EBITDA 9x). Our 12m TP is unchanged, implying >50% upside.
Finland joining NATO; the leak of classified US documents relating to the war in Ukraine; recent Chinese military drills around Taiwan: defence-related news flow has remained prominent in areas of present military tension. Following a strong first half, Cohort PLC itself is closing FY23 with contract extensions at MASS and CHESS totalling c. £30m over periods of up to 7 years, with a focus on e-warfare. We noted at the Interim that over £80m of orders deliverable in the second half equates to 95% coverage of our FY23 year revenue outlook of £165.0m, and order intake of £88.6m resulted in a record closing order book of £304.2m. Following that strong H1 performance, we raised our FY23 outlook by 3% to £165m (+20%YoY) and maintained our (adj.) EBITDA outlook of £22.0m (+13.1%YoY). Cohort trades on a current FY EV/EBITDA of 8.1x and for FY24 (E) just 7.5x so our Fair Value remains at 650p/share.
EWOS extension valued at £5m Subsidiary MASS has been awarded a 2-year extension, worth £5m, to supply Electronic Warfare Operation Support to the UK MOD. The work provides software development, modelling and countermeasure services. This again highlights that MASS is a trusted partner to deliver critical electronic warfare operational support services. Our view No changes to estimates but encouraging to see MASS build its pipeline. It is the highest margin subsidiary, and combined with the £11m Chess contract extension, announced yesterday, visibility is further enhanced. At H1 results, announced in December, order cover was >95% of consensus FY23E revenue. Some contracts stretch out to 2032. The balance sheet also provides optionality (FY23E net funds of £5m). The shares are on an FY23 P/E of 13.5x and an EV/EBITDA of 8.1x, both below the forward year 10-year average (P/E 14.5x and EV/EBITDA 9.8x). Our TP is unchanged at 700p, implying >50% upside.
Surveillance contract valued at £11m Subsidiary Chess Dynamics Ltd has been awarded an extension to an existing contract (announced on 6th July 2020), to supply surveillance equipment to a European customer, with deliveries expected to commence in H2 of FY24. The contract extension has a value of approximately £11m, strengthening the Group’s order book and enhancing the visibility in the coming financial year and beyond. Our View No changes to estimates but improved outer year visibility is encouraging. At H1 results, announced in December, order cover was >95% of consensus FY23E revenue (FY21:89%). The balance sheet provides optionality (FY23E net funds of £5m). Demand for Cohort’s array of expertise in defence markets is supported by the UK’s aspirations to invest 2.5% of GDP in defence and rising budgets / tensions in Europe and Asia-Pacific. Valuation: Cohort offers good value in a shrunken listed defence sector. The shares are now trading on an FY23 P/E of 13.2x and an EV/EBITDA of 8.0x, both below the forward year 10-year average (P/E 14.5x and EV/EBITDA 9.8x). Our TP is unchanged at 700p, implying >50% upside.
Cohort’s expertise in innovative defence and security products and services are increasingly suitable for a wide range of global customers whose budgets are likely to rise. It is in a prime position to benefit from the growth in global defence spending that should result from increased geopolitical tension. We expect a return to sustainable organic growth in the current year accompanied by strong cash flow. An FY24e P/E multiple of 11.8x is undemanding, accompanied by 10% dividend income growth.
For the six months to 31 October 2022, Cohort PLC reported a strong performance: revenue was up 29%YoY to £77.5m; an operating profit (adj.) of £5.0m was achieved (H1 22: £1.7m); and EBITDA (adj.) was £7.1m. Order intake of £88.6m resulted in a record closing order book of £304.2m. The interim dividend is raised 10% to 4.25p/share. Absorption of working capital meant that H1 net debt was £0.6m; however, Cohort reports that as of 9th December net funds were £7.6m. Added to H1 revenue, over £80m of orders deliverable in the second-half equates to 95% coverage of our revised full year revenue outlook of £165.0m. A strong interim performance, in particular by MCL, supports an increase in our FY23 revenue outlook of 3%, to £165m, growth of 19.9%YoY; while our EBITDA (adj.) outlook remains at £22.0m (up 13.1%YoY). We maintain our Fair Value of 650p/share.
H1 summary: For the six months ended 31 October, the Group delivered adj. operating profit of £5.0m (2021: £1.7m) from revenue of £77.5m (2021: £60.0m). This was driven by higher revenue at Chess and MCL offsetting slower deliveries at EID that resulted in an operating loss. A cash outflow from operations of £4.9m (2021: inflow of £9.1m) is due to higher receivables, particularly at MCL following a strong H1, and timing of supplier payments. Net debt was just £0.6m. The H1 dividend was increased by 10%. Outlook: Management’s FY outlook is unchanged given most of the second half of this financial year is underpinned by the order book. Challenges in material supplies and recruitment have continued but are showing some signs of improvement. Medium-term growth prospects remain positive. Estimate changes: Our estimates change only for mix (see page 3). We increase estimates for MCL, which delivered a very strong H1 performance. This offsets weaker EID performance, which continued to suffer order delays. Our view: Demand for Cohort’s secure communications and sensor technology is rising with tensions in Europe and the Asia-Pacific. The order book offers exceptional FY visibility. Its increased longevity is also encouraging with revenue now deliverable out to 2032. The balance sheet continues to provide optionality (FY23E net funds of £5m). The shift in geopolitical landscape is benefitting Cohort and there is outer year upside risk. Valuation: Cohort offers good value in the shrunken listed defence sector. The shares are now trading on a FY23 P/E of 11.8x, EV/EBITDA of 7.1x and DPS yield of 3.3%. Our SoTP-derived 12m TP is unchanged at 700p, implying >70% upside. Recent share price weakness is an opportunity. Buy.
Edison Investment Research is terminating coverage on Schroder Asia Pacific (SDP), Fundsmith Emerging Equities Trust (FEET), Cohort (CHRT) and Akobo Minerals (AKOBO). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
In our recent note following the trading update on 26 September 2022, we upgraded our FY24 EPS estimate to reflect an expected cut in future UK corporation tax rates. As the proposed tax cut has now been withdrawn, it is necessary to reverse that adjustment. As a result, Cohort is trading at a still undemanding FY24e multiple of 13.6x and, while falling by 6% to 683p, the DCF value remains at a substantial premium to the current share price.
Cohort’s trading update ahead of its AGM and capital markets day continues to indicate the FY23 trading performance is ahead of the prior year. A continued strong level of order intake supported by UK MOD activity appears to be mitigating some ongoing supply chain delays, mainly affecting EID in Portugal. Our group FY23 estimates remain unchanged. For FY24 we now assume a lower tax rate which lifts our EPS estimate by c 7%. The resulting FY24 P/E of 12.6x looks increasingly undemanding with the lower UK tax assumption boosting our DCF value to 726p per share (from 684p previously).
Cohort has reported order wins since the start of the financial year of over £70m and a resulting order book of over £300m, indicative of c.95% cover of consensus FY23 revenue outlook. Encouragingly, order book longevity continues to increase. The most recent events in the war in Ukraine serve as a reminder of the renewed emphasis on defence preparedness across NATO and in the UK. Cohort reports increased levels of activity from the UK MOD, highlighting MCL – specialist in electronic communications and information systems – where strong performance in FY23 is expected The expanded order book Cohort reports, backed by order longevity, underpins our April 2023 estimates, which remain unchanged at revenue growth of 16.5%YoY to £160.5m and EBITDA growth of 13.5%YoY to £22.0m. Consequently we reiterate our Fair Value of 650p/share.
Record order book – now over £300m, giving 95% FY23 consensus revenue cover Having entered FY23 with a strong order book of £291m, contract wins totalling over £70m since then (1 May to 20 September) have pushed this to a new record level of over £300m. The visibility that this larger order book provides is now 95% (up from 90% at 28 July) of FY23 consensus revenue (FactSet FY23 consensus revenue £162.5m, INVe £161.1m). The recent £70m+ of contract awards include the £34m win for maritime specialist Systems Engineering & Assessment (SEA) announced on 7 September. Higher UK MoD activity but supply chain shortages continue to cause delays There has been a higher level of activity from the UK MoD, especially at Marlborough Communications (MCL), which is now expected to deliver significant y-o-y growth this year. There remain some impacts from supply chain delays and price increases, especially in advanced communication systems specialist EID. There have also been some order delays at EID which has led the Board to now expect EID’s performance in FY23 to be weaker than that seen in FY22 (FY22A £0.9m, INVe FY23E adj. EBITA £1.2m). We expect this EID profit shortfall to be at least covered by the stronger MCL performance. We leave our headline forecasts unchanged across all years. Strong net cash as expected Net cash at 23 September was £7.2m, down from the FY22 level (£11.0m), and in line with the run-rate implied in our FY23E forecast. The decline is mainly due to the timing of working capital movements. We maintain our £5.4m FY23E net cash balance estimate, with an expectation that cash balances will be managed carefully given the increasing interest rates. Maritime Capability investor presentation CHRT will today host an investor presentation on the Group’s maritime capability, starting at 2:45pm. It will focus on current global defence markets and the offerings from SEA and ELAC Sonar. No new material will be disclosed.
Cohort’s subsidiary, SEA, has continued its strong order intake momentum by announcing a major new £34m support contract for the Royal Navy. The order augments the improving prospects for SEA as sales activity normalises following the pandemic hiatus. It also further underpins future revenue visibility at the group level, which was already strong with order cover at 90% of FY23 market consensus sales estimates in July although supply chain issues remain a risk. As Cohort’s defence focus returns to organic growth in FY23, the rating looks undemanding and well below our DCF value of 684p.
£34m over 5 years Subsidiary SEA has been awarded a £34m contract to provide systems and upgrade of Anti-Submarine Warfare and countermeasures systems to the Royal Navy. Under the contract SEA will also provide in-service support for five years with the option to further extend for two years. >90% FY cover No change to estimates but this further underpins our assumptions and highlights SEA’s position as a key supplier of maritime defence systems. For context, SEA generated a 10.9% margin on revenue of £31m last year and we estimate a 12% margin on revenue of £35m in FY23E (April y/e). FY results, announced in late July, showed FY23E order cover was already at 90% vs. 70% at the same point last year. Unchanged estimates reflect conservatism around supply chain constraints. Rising defence spending We believe outer year estimates have upside potential given current momentum and rising defence spending. Liz Truss’ appointment as the new UK PM is expected to result in defence budget increases, especially with Defence Minister Ben Wallace remaining in place. In recent reports, Truss is looking to move defence spending up to 3% of GDP by the end of the decade, which RUSI calculates would be an extra £157bn. Funding questions remain. Valuation There are now few ways for investors to gain niche defence exposure and yet the shares trade on a CY23E EV/EBIT of <10x, P/E of 14.5x and DPS yield of 2.8%. Our SOTP based TP offers 40% upside.
The nature of the ongoing conflict in Ukraine, and its impact on near-term Cohort performance, is hard to predict. However, the recent change in stance by NATO and in general towards overseas defence, adds both confidence and momentum to our medium-term outlook for Cohort. The standout feature of recent FY results was a record year-end order book of £291m. This underpins £128m or 78% of market FY23 revenue outlook and gives increased visibility and management confidence in FY23 performance which is “expected to be ahead of 2021/22”. Furthermore, Cohort reports that revenue coverage reached 90% by early July, adding that order longevity is also increasing. Analysis of Cohort’s peers with exposure to the defence sector indicates a market cap-weighted average EV/EBITDA of 9.1x and PE of 18.0x. Hence the rerating potential of Cohort leads us to conclude that 650p/share is a more realistic assessment of the Group’s inherent fair value.
Cohort’s position as a growing international defence company is being increasingly recognised as the sector gains relevance for governments and investors alike. The Russian invasion of Ukraine is stimulating short-term operational requirements but, more importantly, has initiated a return to higher long-term defence spending commitments from NATO members. Cohort’s positioning in the training and supply of critical capabilities to its customers should benefit from the enhanced environment. FY22 was challenging for EID and Chess, but the rest of the business developed positively and prospects for a return to growth this year are good. Despite the recent share price gains, these prospects are not reflected in the rating, and our updated discounted cash flow (DCF) value of 684p/share indicates significant potential.
FY summary: Unaudited prelims show performance in line with guidance and robust cash generation taking net funds to £11m. Revenue of £138m (4% decline), adj EBITA of £15.5m (11% margin), adj (FD) EPS of 31.1p and DPS of 12.2p compare to our estimates of £149m, £15.5m, 30.0p and 12.2p respectively. High margin MASS remains the largest contributor representing 46% of profit pre central costs. Improvement at MCL, SEA and a strong first FY contribution from ELAC countered weaker Chess and EID performance. Outlook: Customers’ response to the situation in Ukraine had some positive business impact in FY22 and this is expected to increase. The year has started in line and the outlook is encouraging. A record year end order book of £291m represented a 20% increase and a lengthening of visibility. Moreover, FY23 order coverage has risen to 90% in early July following contract wins in the first two months. Management expect lower (but positive) net funds at 30 April 2023 as a result of planned capex and expansion of working capital. Estimates: Overall, management expect to achieve continued growth at a modest level, unchanged from guidance in May. As such, our earnings estimates are largely unchanged except for mix and a slight increase in tax assumption in FY24E. We also introduce estimates for FY25E. Retirement: Co-founder (in 2006) and 22% shareholder Stanley Carter has decided not to stand for re-election as a NED at the AGM in September. Our view: The Russia-Ukraine conflict and concerns around China support overall increasing levels of defence spending. Cohort stands out as a long term beneficiary within the SMID cap names and there are now few ways for investors to gain niche defence exposure (e.g., C4ISTAR & anti-sub warfare).
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.
FY22 cash beat: The FY (to 30 April) update shows net funds of £11m vs. our estimate of £0m, and vs. £2.5m at the same point last year. We understand some of this is due to timing but some benefit can be kept. Trading performance was in line, although on slightly weaker revenue (we await detail at prelims in July). Stronger performances came from MCL, SEA, ELAC and MASS, offset by weaker performances from Chess and EID. Strong demand: A record closing order book of £287m vs. £242m in April 2021. The closing order book underpins nearly £113m of revenue for this year. FY23 outlook: Overall, despite residual challenges of the pandemic and uncertain economic conditions, management expect to resume organic growth and are not changing expectations for the current financial year. We are encouraged to hear that self-help at Chess is starting to show through. Estimate changes: Our P&L estimates are unchanged, which seek FY22E and FY23E adj PBT of £15m and £18m on revenue of £149m and £162m. We upgrade our FY22E net cash estimate to £11m from £0m and carry forward some benefit to outer years. We update our assumptions for working capital, capex and acquisition spend (minority shareholding in Chess in H1). Consequently, our FY23E net cash rises from £3.0m to £6.8m. Our view: The shares have drifted off by 10% this month, which is an opportunity. Demand for Cohort’s advanced electronic, surveillance, counter-UAV and naval equipment has momentum as a result of the conflict in Ukraine. Meanwhile, the record order book and net funds of £11m provides a strong start the year. The stock is now on a CY22E P/E of 14.9x, a 16% discount to defence peers, and on a DPS yield of 2.6%. Our SoTP-derived 12m TP rises to 640p from 620p due to the improved cash position, offering a forecast total return of 33%. Maintain Buy.
H122 results proved disappointing as Chess failed to deliver against expectations. The weakness at EID was anticipated, although there is a further deferral to its recovery. MCL, SEA, MASS and ELAC are all expected to make progress in FY22. However, this will not compensate for the shortfall at Chess and we have reduced our EPS estimates by 12% in FY22 and 8% in FY23 to reflect that. We expect that following a strong recovery in FY23, Cohort should return to sustainable growth in FY24.
1H21 results: Order intake increased 18%; however, delays to some orders has impacted performance at MASS, EID and Chess. Revenue increased 10%, driven by the first full six-month contribution from ELAC. MCL and SEA delivered stronger performances and MASS remains the largest contributor to profits, albeit at a lower level YoY. As previously flagged, EID had a weaker performance vs prior period. Chess has disappointed with a weaker than expected performance, leading to adj. operating profit materially lower at £1.7m (-60% YoY). The statement highlights increased lead times and pricing of electronic components, which will be monitored closely. Net funds inflow in the H1 was better than expected due to timing of payments and receipts. Outlook: While the outlook for most of the business is unchanged, highlighted order and delivery issues will impact the FY performance. Recovery is expected during H2 but will not fully make up for the H1 decline in profitability. The Group continues to expect to be at zero net (debt)/funds at year end, following the buyout of the Chess minority expected in the second half. Estimate changes: We reduce FY22E/23E/24E adj (FD) EPS by 12%/6%/4%, largely driven by Chess, with mix tweaks across the Group. A lower expected tax rate in FY22 due to R&D credits provides a small offset. Our view: While disappointed to be downgrading FY estimates, we see order and delivery issues as being genuinely temporary in nature; actions are being taken and the medium- and longer-term opportunity is undiminished, with the order book now supporting revenues expected in the 2030s. A changing geopolitical landscape may also present more opportunities for growth. Our SoTP-derived 12m TP decreases to 620p (from 690p). A negative market reaction this morning could see a lower entry point - we maintain Buy.
Banquet Buffet Bivictrix 26.5p £17.5m (BVX.L) BiVictriX Therapeutics, an emerging biotechnology company applying a novel approach to develop next generation cancer therapies using insights derived from frontline clinical experience announced a collaboration to manufacture BiVictriX's antibody-drug conjugates with Abzena Limited, a partner research organisation for integrated discovery to cGMP manufacturing solutions for biologics. The collaboration will allow BiVictriX to cost-effectively manufacture its anti-cancer ADCs for use in pre-clinical models without the need for extensive manufacturing facilities of its own. ADC production will be carried out in two cycles: the first cycle being ADC manufacturing for proof-of-concept studies; and the second cycle will cover ADC lead selection and optimisation. This collaboration has been secured just three months after BiVictriX listed on the AIM market of the London Stock Exchange, raising gross proceeds of £7.5m. Cohort 616p £253m (CHRT.L) The Portuguese military communications company EID, part of Cohort plc, has been awarded a EUR8.5m contract by the Portuguese Army to supply its Dismounted Soldier System to infantry forces. Deliveries will start in 2022 and will go on through to 2026. The Dismounted Soldier Communications System encompasses a full range of high-tech voice and data communications equipment, including personal and handheld radios, data terminals, and Dismounted Soldier Integrator (data and energy integrator). Additionally, it can integrate with other external sensors carried by the soldier. Croma Security Solutions 92p £13.9m (CSSG.L) Croma Security Solutions Group Plc, the total security services provider, announced the acquisition of the entire issued share capital of Safeguard Ltd for an upfront consideration of £0.53m plus a deferred consideration of up to £0.08m. Safeguard is a Manchester based locksmith business servicing the security needs of Cheshire and operating from a retail store in Warrington. In the 12 months to 30 September 2021 Safeguard generated revenues of £0.5m and EBITDA of £0.1m. The business was family owned and has £0.1m of cash and a freehold property valued at approximately £0.35m. Safeguard was established in 1982 and over time has built up a loyal customer base amongst local homeowners and businesses, focusing on providing security products to ensure building safety. The acquisition is in line with the Company's strategy to establish a national chain of modern security centres offering the full range of the Group's services from manned guarding to CCTV, intruder alarm and advanced security systems as well as high security locks. The Safeguard store will be rebranded and adapted to become a security centre and will benefit from having the Group's broader expertise and product range behind it. The total number of security centres is now 11. Crossword Cybersecurity* 38p £28.5m (CCS.L) The technology commercialisation company focused on cyber security and risk management announced the appointment of Naina Bhattacharya, Global Chief Information Security Officer at Danone S.A, who joins Crossword's Advisory Board with immediate effect. The Advisory Board, made up of senior information security figures from the corporate world, academia, defence and government, provides a range of unique perspectives that benefit Crossword clients and inform Crossword's product development strategy. Naina Bhattacharya is Global Chief Information Security Officer at Danone S.A.. Prior to Danone, she worked in consulting and had the privilege of working on complex cybersecurity and data privacy projects across multiple companies in several industries. Naina holds a BEng in Computer Science from BITS, Pilani, India and a post-graduation in management from the Indian School of Business in Hyderabad. Professor Nick Jennings has stepped down from Crossword's Advisory Board as he takes up his new role as Vice Chancellor and President of Loughborough University. Crossword's Directors would like to thank Professor Jennings for his service to the company. Cyanconnode 26p £57.2m (CYAN.L) The specialist in Narrowband Radio Frequency (RF) Smart Mesh Networks announced the formal opening of their new Corporate Office and IoT Innovation Centre in India. The IoT Innovation Centre, which was inaugurated by Executive Chairman, John Cronin, showcases and builds on CyanConnode's award winning 3rd generation Omnimesh IoT architecture. Keeping India's ecosystem and requirements in cognizance, the IoT innovation centre will cater to the country's requirement of deploying 250m smart prepaid meters, with a focus on innovation, research and development. CyanConnode's solutions such as hybrid communication for both RF and Cellular meters, long-range RF solution for scattered agricultural and semi-urban consumers is being developed and tested further through this IoT Innovation Centre. FIH Group 245p £30.7m (FIH.L) The international specialist services group with businesses in the Falkland Islands and UK, announced an important new contract secured by its Falkland Islands business (FIC). FIC the Group's long-established supplier of essential services to the people of the Falkland Islands has been successful in winning a £17.3m contract to build a total of 70 houses for the Falkland Islands Government (FIG) and the UK Ministry of Defence (MoD) in Stanley and at the Mount Pleasant military base. The contract was won after a competitive tender and will involve the construction of 40 houses for FIG and a further 30 units for the MoD over a period of four years with completion targeted for the end of 2025. The contract is an NEC4 fixed price contract with the possibility of additional client variation orders and agreed protections against unexpected price inflation in labour and materials. The contract follows an earlier 18 house contract for FIG which was extended to 26 units, and which was successfully completed earlier this year. Building work will commence on the two sites involved later this year utilising FIC's existing team of local construction professionals wherever possible and with materials and additional labour being supplied from the UK. There will be only limited financial impact from the contract in the current financial year. Mirriad Advertising 32.5p £90.7m (MIRI.L) The in-content advertising company announces a partnership with CANAL+ Brand Solutions to launch a new premium advertising offer. In a first for French cinema, CANAL+ Brand Solutions is now offering advertisers the use of the Mirriad platform to insert products or brands dynamically and seamlessly into finished video content. Starting with feature films, it is hoped that the partnership will extend across CANAL+'s diverse content library in due course. The first insertions of this type will be made available in the 2022 film Tenor, a feature film by Claude Zidi Jr. with Michèle Laroque and Mohamed Belkhir, co-produced by Darka Movies and First Step, distributed by Studiocanal. Poolbeg Pharma 10.38p £51.9m (POLB.L) Update on the clinical development progress of its lead asset, POLB 001, a small molecule immunomodulator for the treatment of severe influenza. The Company intends to commence the Phase Ib human challenge study of POLB 001 in June 2022 which will be a key step in the molecule's development. To enable this study, the Company has signed a Letter of Intent to retain the Centre for Human Drug Research (CHDR) to run the challenge study and signed an agreement with SEDA Pharmaceutical Development Services for drug formulation services. A vendor has also been selected for GMP manufacturing of POLB 001. In this study, clinical researchers from CHDR will stimulate a healthy volunteer's immune system with bacterial lipopolysaccharide (LPS) in a safe and controlled clinical environment. The study will provide key human data on the efficacy of POLB 001 in dampening the immune response in otherwise healthy volunteers. The design of the study (the study protocol) is expected to be finalised by the end of Q1 2022. In advance of the Phase Ib study commencing, the Company has completed the manufacturing of a non-GMP batch of POLB 001 which is on hand for any non-clinical (not administered to humans) requirements, such as formulation. This is also an important step in validating the manufacturing process. On this basis, manufacturing can now be scaled up as required as the clinical development phase progresses. The Company will now move towards manufacturing GMP grade POLB 001 material needed for the LPS challenge study and has similarly selected a vendor for this work. Woodbois 4.6p £85.4m (WBI.L) The African focused forestry, timber trading, reforestation and voluntary carbon credit company, has joined The Circular Bioeconomy Alliance, an organisation that brings sustainability focused enterprises together and places nature at the heart of restoring the global circular bioeconomy. The CBA was established by His Royal Highness, The Prince of Wales, in his Sustainable Markets Initiative in 2020. The organisation aims to accelerate the transition to a circular bioeconomy that is climate neutral, inclusive and prospers in harmony with nature. The Alliance provides knowledge-informed support as well as a learning and networking platform to connect the dots between investors, companies, governmental and non-governmental organisations and local communities to advance the circular bioeconomy while restoring biodiversity globally. Yourgene 12.25p £88.66m (YGEN.L) The international molecular diagnostics group welcomes the publication in Clinical and Translational Oncology, titled: 'Consensus of experts from the Spanish Pharmacogenetics and Pharmacogenomics Society and the Spanish Society of Medical Oncology for the genotyping of DPYD in cancer patients who are candidates for treatment with fuoropyrimidines', which highlights the benefits of using a DPYD genotyping test to help identify cancer patients with Dihydropyrimidine Dehydrogenase (DPD) deficiency prior to treatment with the chemotherapeutic drug 5-Fluorouracil (5-FU). Yourgene launched the Elucigene® DPYD assay, used to detect the four most clinically relevant DPYD mutations, back in September 2019, and has already welcomed the screening recommendations in Germany, Wales, NHS England and Belgium.
CHRT CSSG CYAN FIH MIRI YGEN 9N4
Good progress - Order wins since 1 May of over £85m, including recent contract wins for ELAC, MASS, SEA and MCL, have grown the order book to just under £300m as at 16 September. FY revenue cover now stands at a healthy 82% from 64% at the beginning of the year. At this stage last year, cover stood at 83% and at 76% in the prior year. In-line despite challenges - While some of the pandemic-related delays highlighted at the prelims have persisted and global supply chain challenges have arisen, FY guidance is consistent with our existing forecasts. Management continue to expect FY trading performance for 2021/22 will be slightly ahead of last year, and to have zero net debt at year-end. Estimates unchanged – We forecast low single digit earnings growth this year to 34p and a return to high single digit earnings growth to 37p in FY23E based on current orders for long term delivery and strong pipeline of opportunities. We forecast zero FY net debt, consistent with guidance. Firepower - Net funds at 31 August stood at £3.3m, compared to net funds of £2.5m at 30 April. The Group's cash and readily available credit at Q1 was just over £43m providing significant headroom for current anticipated commitments and any corporate activity. Our view / valuation – We observed a busy stand at the DSEI show last week and believe prospects are strong. The AUKUS announcement may be beneficial longer term. Meanwhile, the balance sheet provides significant headroom and the stock has increasing rarity value within this consolidating sector. The shares trade on an attractive CY22E P/E of 16.1x, EV/EBITDA of 9.9x, FCF yield of 5.7% and DPS yield of 2.3%. TP 690p.
MCL awards Cohort subsidiary Marlborough Communications Ltd. (MCL) has been awarded three new contracts with the UK Ministry of Defence (MoD) with a combined value of approximately £3.75m. The contracts are further orders for hearing protection, including the tactical hearing protection system for the dismounted close combat user. All orders are deliverable in FY22 (Apr. y/e), further strengthening the order book and underpinning forecasts. We estimate that FY22E order cover nudges up to c72% (vs 70% at the time of the FY21 results on 27 July). Our View Cohort’s array of expertise in defence markets remain attractive, the balance sheet is deployable and geopolitical tensions continue to rise. Shares have recovered the July losses following good FY21 results on 27 July and a supportive macro backdrop, but still represent upside, on a CY21E P/E of 18x falling to 16x. Next events : DSEI show on 16 September (let us know if you would like to join us), AGM 20 September.
Cohort has progressed once again in FY21 despite significant constraints placed on parts of the business due to the pandemic. The five-month initial consolidation of ELAC enabled a small advance in adjusted PBT and a full FY22 contribution should help to offset an anticipated sharp decline at EID in Portugal. As all of the other ongoing divisions are expected to improve in FY22 supported by the record group order backlog, a small increase in adjusted PBT is still forecast. We expect a resumption of growth in FY23 as EID improves. The FY23 P/E of 13.7x looks undemanding especially given valuations being established elsewhere in the UK defence sector.
Improved visibility Cohort’s recent acquisition ELAC Sonar has received a >€49m order from Leonardo, to provide sonar systems for two new submarines for the Italian Navy. Work commences immediately and will complete in 2030. It also includes options for two more U212 NFS submarines. ELAC will work with Leonardo and Fincantieri to create a capability that is unmatched on a submarine of its class. Our view While there is no change to estimates, this is an important win for ELAC given it competes with Atlas Elektronik and Thales. Moreover, it brings ELAC’s FY order cover to >80% and Group FY cover to circa 70%. It also serves as a visible endorsement of ELAC’s Sphere technology. We are pleased to hear Sir Robert Walmsley will be involved in helping to guide ELAC. Attractive valuation Cohort now trades on a CY22E EV/EBIT of 11.4x, a 10% discount to UK defence peers. CY22E FCF yield of 6.1%, which compares to UK peers average of 4.7%. CY22E DPS yield of 2.2%, which compares to the FTSE AIM index averaging 1.2%. Meanwhile, the balance sheet is strong with FY21E net cash of £2m. Our SoTP-based 12m target is 690p, offering 22% upside. Next catalyst Prelims are expected to be announced in late July.
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.
FY21 update – Trading expectations unchanged. Net cash of £2m (previously net debt of £5m) driven by timing benefits. Order intake benefited from a £25m contract awarded in March to SEA for the management and upgrade of in-service sonar equipment for the UK MoD, and significant contract awards at Chess, MASS and MCL. The Group’s closing order book grew substantially to c.£240m (2020: £183m), of which certain orders extend out to 2031. FY22 outlook – Despite FY order cover improving to 63% from 60%, delays in the placing of certain orders with EID is likely to negatively affect trading performance. While the overall performance of the Group’s other businesses means the Group’s revenue expectations are unchanged, the mix of revenues is expected to see a reduction in the Group’s overall margin. Estimate changes – We reflect the better FY21E cash outturn while reducing adj. (FD) EPS by 12% in FY22/23E, reflecting delayed orders and lower profitability at EID, slightly offset by strength in MASS, SEA, Chess and ELAC. EID – This business is a Portuguese based company that designs and manufactures advanced communications systems for naval and military customers. Cohort acquired a majority stake in June 2016. In FY20A, it generated a 17% operating profit margin on revenue of £18m. Valuation – The shares trade on a CY22E P/E of 18.2x, EV/EBITDA of 11.4x and FCF yield of 5.2%. While EID weakness is disappointing, the balance sheet is strong and management flag good prospects for significant new orders. Our SoTP-based 12m target falls to 690p from 700p. Next catalyst – Prelims are expected to be announced in late July.
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.
H1 summary: Revenue fell by 9% to £54m, but adj. EBIT grew 7% to £4.3m implying a 78% H2 weighting, in line with last year. There was an improved performance at MASS, which remains the main contributor to profit, and a return to profit at SEA, partially offset by weaker performances at Chess and MCL. H1 net debt was £6.1m, lower than expected due to timing of payments and receipts. Outlook in line: FY performance is expected to be in line with market expectations. Encouragingly, the order book has increased by 19% since April to £219m, from which 92% of FY21E revenue is covered. Prospects in H2 to further underpin this year and next are described as ‘good’. Estimates unchanged: We make no changes to estimates, but note improved order cover, upbeat tone and increased MoD funding. Furthermore, we believe our FY net debt forecast of £5m, in line with guidance and representing 0.2x EBITDA, has headroom to improve, but acknowledge Q4 can be lumpy. Latest addition: The acquisition of ELAC completed last week, enhancing Cohort’s maritime defence offering and outer year estimates by 2-3%. It represents strategic progress and was acquired cheaply. It had a headline price of €11.3m, representing 6x CY19 EBIT. We understand the business comes with a significant cash balance, but a defined benefit pension in deficit by €8.4m at 31 December 2019 and so, based on estimated CY20E EBIT of €1.0m, we calculate the business was acquired for a CY20E EV (incl. pension deficit)/EBIT of 9x. Upside should arise from synergies with SEA. Valuation: The shares trade on a CY21E P/E of 16.7x, EV/EBITDA of 10.9x and a FCF yield of 4.5%. We remain attracted to Cohort’s strong offerings within the defence market, improving order backlog and M&A potential. BUY.
Cohort has completed the acquisition of ELAC Nautik from Wartsila for a headline consideration of €11.25m, as previously announced. ELAC extends Cohort’s maritime offering and has attractive medium- to long-term prospects. It will make an initial five-month contribution and should be modestly earnings enhancing. More detail should be available with interim results next week, but the lack of a trading comment suggests the ongoing activities remain on track to meet market expectations.
More maritime exposure: The acquisition of ELAC from Wärtsilä enhances Cohort’s maritime defence system offering, with market-leading technology in surface ship and submarine sonars, underwater communication systems and echo sounders. Growing naval markets account for 80-90% of its revenue. It will be renamed ELAC SONAR and become Cohort’s sixth subsidiary. Good value: The acquisition was first announced last December but required German government approval that was finally received in November. It had a headline price of €11.3m, funded from existing resources, representing 6x CY19 EBIT. We understand the business comes with a significant cash balance but a defined benefit pension in deficit of €8.4m at 31 December 2019 and so, based on estimated CY20E EBIT of €1.0m, we calculate the business is being acquired for a CY20E EV (incl. pension deficit)/EBIT of 9x. Estimate changes: While higher interest and German tax offset the estimated contribution for the remainder of FY21E, we upgrade FY22E and FY23E adj. EPS by 2% and 3% respectively. We do not reflect any revenue synergies. As indicated above, our FY21E net debt rises by just £0.3m to £4.9m. Upside from synergies: ELAC shares highly complementary expertise and technologies with SEA, providing a significant cross-selling opportunity. The business has strong penetration in South East Asia and Europe. The acquisition also adds Germany as a domestic market. Valuation / next event: Our TP rises from 690p to 700p to reflect the acquisition. Interims are scheduled for next Thursday. As a reminder, the Q1 update reiterated FY guidance of flat performance, but signalled improved FY21 order cover of 83%, which compared to 76% at that point last year.
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Q1 update - The majority of employees are now back on site on a part-time or regular basis following the lifting of lockdown. Travel restrictions continue to constrain development of new export opportunities. However, the Group entered the 2020/21 financial year with a substantial long-term order book, a strong pipeline of order prospects and has continued to win new business. In the four months to 31 August, the order book grew 14.8% to £210.0m, underpinning c. 83% (or £113m) of the new financial year’s consensus forecast revenue. This compares to 76% at the same time last year. Strong balance sheet - Net debt at 31 August stood at just £1.4m, compared to £4.7m at year-end. The Group's cash and readily available credit was c.£38m providing significant headroom for current anticipated commitments, including the completion of the transaction to acquire ELAC. ELAC delay - The proposed acquisition of this Germany-based market leader in surface ship and submarine sonar systems was announced last December. Completion was expected by the end of this month. However, the process has been delayed by COVID-19 and other factors. A clearer idea of the completion timetable will follow a meeting later this month. The acquisition is not yet in our forecasts. We originally thought it could deliver c.3-5% accretion in FY21E. Estimates unchanged - FY guidance is unchanged with trading performance for FY21 expected to be in line with last year, and growth thereafter. FY net debt is expected to remain flat, after taking account of the acquisition of ELAC. Our view – We are encouraged by the improving cover and strong balance sheet. UK budgets may tighten, but Cohort’s relevant expertise and established positions in electronic warfare, cyber security, communications and anti-drone equipment, are attractive. The next catalyst is H1 results in December. BUY. reflecting peer multiples, improved visibility and attractive defence exposure
Cohort has reported FY20 results with no major surprises following the close period trading update in May. Despite some COVID-19 impact in Q420 in terms of customer orders and delivery acceptances, sales increased 8%, generating double-digit improvements in adjusted operating profit and EPS, all of which represent record levels for the group. While the immediate outlook remains subject to pandemic effects, management expects to deliver FY21 performance in line with FY20.
Cohort has released a year-end trading update that reflects the impact of COVID-19 on its activities in the final two months of FY20, usually the busiest period for the group. As a result, management has provided guidance that has led us to reduce our sales and profits estimates by 9% for FY20, with a lower tax charge limiting the impact on EPS to just over 2%. Cohort’s best current guidance is for FY21 performance to be in line with FY20. The resultant P/E ratio of 15.4x for FY21, the current year, allows for no enhancement from the expected acquisition of ELAC Nautik in the summer. In our view, the rating remains undemanding.
FY20 in line: The year-end update signals adj EPS of 35p is in line, aided by a lower tax rate. Trading was broadly in-line prior to COVID disruption in the last two, busiest, months of the year to 30 April. As a result, revenue of c.£133m and adj EBIT of c.£18m were 10% and 5% below our forecasts respectively; suggesting a stronger exit rate underlying margin, pre-disruption. Net debt was better at c.£5m as UK MoD has accelerated payments and represents just 0.3x EBITDA. Given this, the Board expects to recommend a final dividend. FY21 outlook: The order book at 30 April of c.£186m underpins c.£83m of revenue in the current year, representing c.60% of expected FY revenue. Liquidity of c.£25m includes c.£5m of facility headroom, which should be ample. COVID has meant it is difficult to give detailed guidance, but at this point expectations are for FY21 trading performance to be in line with FY20. Changes to estimates: We reduce FY21E adj EBIT by 10%, to £18.2m. Adj EPS is reduced by 15% as we now expect an increased tax rate and higher minority interests. We cut FY21E net debt to reflect expected cash neutrality. ELAC acquisition: The proposed acquisition of this Germany-based market leader in surface ship and submarine sonar systems was announced in December. Discussions with the German regulator are ongoing, but have been delayed due to lockdown restrictions. Completion had been expected in June which is likely now delayed 2-3 months. The acquisition is not reflected in our forecasts, but we note it could represent c.5% accretion in FY21E. Valuation: Our SOTP based TP of 600p, from 640p, reflects new estimates. We remain encouraged by a number of significant new domestic and export opportunities, and extensions to existing contracts across the Group. Notice of results: FY20 Prelims are expected in July.
Cohort has delivered a strong first half performance, with healthy like-for-like growth in revenues, and adjusted operating profit augmented by the initial first half contribution from Chess. With a record period-end order book of £207m, prospects remain bright and management expects to meet market expectations for FY20. The strong balance sheet supports the agile growth strategy and is facilitating the proposed €11.3m acquisition of ELAC Nautik from Wärtsilä Corporation which, we estimate, should enhance EPS by around 7% in a full year following completion. Even before the potential uplift from ELAC, the FY21e P/E of 15.8x does not look demanding against defence peers given the progression of the strategy.
Better H1 trading: Revenue grew by 52% and by 17% on a like-for-like basis to £60m. Adj. EBIT of £4m implies a 79% H2 weighting, which compares to 94% last year. MASS was again the largest contributor to profit. Chess contributed a good initial H1 performance. EID returned to profitability. MCL also delivered a better first half. SEA’s lower revenue and investment in its anti-submarine warfare system resulted in a small trading loss. H1 net debt was £6.8m, lower than expected due to timing of payments (pre-IFRS 16). Outlook in line: FY performance is expected to be in line with market expectations. The order book has increased by 8% since April to £207m, from which 83% of FY revenue is covered. Prospects for more orders in H2 to further underpin this year and next are described as good. SEA is expected to return to profit in H2, delivering an FY performance similar to last year. €11m acquisition: ELAC, which specialises in sonar technology, will become Cohort’s sixth subsidiary. The deal is dependent on German government approval. The purchase price represents 8x FY18A EBIT when the business generated a 7% margin. We estimate ELAC will be 5-7% earnings accretive in FY1 and net debt / EBITDA to remain below 1x (pre-IFRS16). Minor tweaks pre ELAC: We make only minor changes to adj. EPS estimates of -2% to +1% across the forecast period, reflecting mix and tax adjustments. There is potential upside to our FY20E net debt estimate albeit working capital can be volatile, particularly as export defence revenue grows (36% of H1 revenue). TP rises to 660p: We remain attracted to Cohort’s portfolio across electronic warfare, secure communications, anti-UAV systems and niche naval equipment. The H2 bias remains high but improving orders are encouraging. Our TP rises to 660p for higher peer group multiples. Site visit: Let us know if you would like to visit Chess in January.
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Cohort’s AGM statement indicates the current year has progressed well, with order cover of sales for the year rising to 76% following recent September orders compared to 60% at the same point of FY19. The order backlog at 31 August 2019 increased by over 10% since the year end to a record £210.9m (FY19 £190.9m) and the pipeline of potential business remains healthy. We maintain our earnings estimates, which means the shares are trading on an FY21e P/E of 12.6x, a significant and unwarranted discount to UK defence peers.
Cohort delivered another year of growth in what remained quite a constrained defence spending environment in its domestic markets. The recently acquired Chess Technologies delivered a stronger than expected performance in its initial period of consolidation, helping to mitigate the slippage of profits into FY20 at EID as an export contract was signed too late to be shipped in FY19. The record order intake and stronger backlogs across the group provide a solid foundation for growth, enhanced by a full-year contribution from Chess. Our EPS estimates are marginally reduced for FY20, but we expect stronger growth and cash flows in FY21. The FY21e P/E of 11.3x remains below UK defence sector peers despite the continued positive progress of the group.
The company has published unaudited FY19 profit in line with expectations and better cash generation. Anti-drone systems, electronic warfare and secure communication capabilities remain key drivers. A strong order book and pipeline impels a confident outlook despite UK budgetary risks. At this stage, our earnings estimates are unchanged. A FY20E EV/EBITDA of 9x is attractive for this defence technology play. EBITA in line: FY19 revenue of £121m, adj EBITA of £16.2m (13.3% margin), adjusted diluted EPS of 33.4p and DPS of 9.1p compare to our estimates of £125m, £16.3m, 31.3p and 9.1p respectively. Chess outperformed. MASS, SEA and MCL grew. EID underperformed. Better cash conversion: Net debt was significantly lower than expected at £6m vs consensus at £16m, as announced on 27 June. Roughly half was due to the timing of a supplier payment that has since unwound. Improved visibility: FY20 order cover of 60% at the end of June compares to 53% last year. Order intake during H2 totalled £190m vs £77m last year. MASS has also announced a £5m contract win today. The FY outlook is in line and so our EPS estimates are largely unchanged. UK budget pressures remain, but global tensions are intensifying and Cohort has highly relevant capabilities. Attractive offering: The rating now has headroom as prior concerns around the heavy Q4 bias and delayed results are removed. UK political risk and low liquidity remains, but Cohort’s expertise in electronic warfare, cyber security, communications and proven anti-drone equipment, is highly attractive, in our view. The shares trade on a FY20E P/E of 12x, EV/EBITDA of 9x and DPS yield of 2%.
As anticipated at the H119 results, order intake for Cohort remained strong through the second half of the year. With the addition of Chess, the backlog at the year end should stand at more than £175m, comfortably a record for the group. It represents c 1.3 years of revenues based on our FY20 expectations and while many of the contracts are multi-year, it does provide increased sales cover for the medium term. Cohort continues to deliver against its growth strategy, appears to be largely insulated from Brexit concerns and still trades on an undemanding P/E multiple.
Following a challenging first half, Cohort has seen excellent order intake in recent months. These underpin anticipated sales for H219 and provide longer-term visibility through some significant multi-year agreements. In addition, the company has bought Chess Technologies, broadening the geographic reach and product range while augmenting growth prospects. The purchase is aligned with the agile growth strategy and was financed through cash and the recently renewed bank facility. Having strongly outperformed its UK defence peers over the last 12 months, the FY20e P/E of 10.7x represents a discount of around 18% to its UK defence peers.
The positive order intake news continues for Cohort. It has announced a further £3.2m contract for MASS to provide business analysis support to the UK’s MOD. In addition, the Portuguese subsidiary EID has won export contracts worth €11m for vehicle intercom systems for two existing customers. The EID contracts include successful acquisition of one of the five potential order opportunities previously indicated in the AGM update. Cohort continues to see improving overall group order inflow, which underpins the outlook for the businesses through FY19 as well as in the medium term. The shares have been performing well in a challenging stock market, and the current FY20e P/E of just 12.3x remains undemanding in our view.
Cohort’s largest division, MASS, has been selected as the preferred bidder for a £50m, eight-year contract for the UK Ministry of Defence (MOD). Success would represent an extension of a core activity that has been undertaken by MASS since 2000. As it was competitively tendered, the down-select also verifies Cohort’s credentials in the provision of in-service support for the MOD. The announcement represents another encouraging sign that Cohort is successfully underpinning its medium- to long-term workloads in its service contracting activities.
The announcement of a €4.8m vehicle communications contract win for the Portuguese Army is in addition to the prospects indicated at the AGM on 11 September. It suggests that positive order book momentum is building as we approach the H118 period end. The shares have continued to perform well since the prelims in July, but remain on a relatively undemanding FY20e P/E of 12.5x.
Cohort has delivered better than-expected operating profit growth in FY18 as it continues to address the changing dynamics of its end markets. The company believes that the decline in the order book represents delays rather than a reduction in demand and, if this is the case, 2018/19 presents exciting business prospects. Cohort continues to invest and address new business areas while further acquisition presents an opportunity.
The relative de-rating of Cohort against its peers since its interim results in December seems somewhat anomalous. The company looks set to maintain solid progress in FY18, which is now coming to a close. Peers in the UK defence sector have continued to face issues that do not directly read across to Cohort. While the UK defence funding environment remains uncertain at present, there appear to be some indications that a more favourable perspective may be developing following recent events. We maintain our forecasts and our fair value currently stands at 508p.
Cohort continues to make progress in a tough UK defence trading environment. Our earnings forecasts remain largely unchanged as performances at MASS and EID continue ahead of expectations, compensating for pressures at MCL and SEA. Our fair value calculation currently stands at 483p implying significant unrecognised potential. The recent share price fall seems unwarranted given the maintained outlook.
Cohort has announced that it has increased its holding in EID to 80% from 57% for the additional consideration of €3.97m from existing cash resources and debt facilities. The Portuguese government retains the remaining 20% and this is all in line with its previously announced strategy. EID brings new geographies, a good order pipeline and further growth opportunities. In addition, the company has indicated that it remains on course to meet FY18 expectations. HY18 results will be published on 13 December when we will adjust our forecasts for the increased holding.
Cohort’s earnings performance in FY17 once again exceeded our expectations. Stronger performances from EID and MCL more than outweighed the sharp contraction at SCS, where a swift response from management has already improved profitability. The cash performance was also better than expected and the dividend increase to 7.1p was also ahead of our forecast. We expect further solid progress in the current year, and our fair value estimate currently stands at 471p.
Cohort’s MCL operation has announced the award of an additional £9.9m four-year contract for the provision of hearing protection systems to the UK MoD. With Cohort having completed the minority buyout on 1 February, the increased visibility from the hearing protection revenue stream now provides greater support for MCL’s medium-term forecasts, increasing earnings quality. Cohort has continued to outperform the market so far this year, continuing to trend towards our fair value of 485p.
Cohort has announced a major new potential business win for its MASS division. A combination of capabilities has allowed it to be selected by the Metropolitan Police Service for delivery of its digital forensic managed service. With an initial potential value of £15m over seven years and a possible three-year extension, the contract would access a potential UK market opportunity for MASS of £230m over the same period. We expect other UK police forces to benchmark their own services and then adopt the Cohort offering. Overall, a positive development for both MASS and the Cohort business model.
Cohort has delivered solid profit growth in H117; this performance is expected to strengthen in the second half. The mix of profitability and reducing minorities has led us to increase our FY18 forecasts by 6% at the EPS level. The progressive dividend policy provides immediate benefit to investors, but the capital progress should also remain attractive. The shares have performed well in recent months, aided by a healthy rerating of peer defence stocks; as a result, our fair value has risen to 485p, supported by the improved cash flow valuation.
Cohort has announced that it will integrate its Systems Consultants Services (SCS) business into other parts of the group. Management believes this will provide better long-term growth prospects. The exceptional cost, which will be incurred in FY17, is estimated at £2m and is expected to result in annual cost savings of c £1.6m. We believe earnings estimates are achievable, but await interim results to confirm mix changes, with no significant change to our fair value estimate anticipated as future cash and earnings benefits offset short-term hits.
Cohort subsidiary SEA has been awarded a contract by BAE Systems for the supply of its External Communications System (ECS) for the second stage of the common External Communications System (cECS) programme. This reaffirms one of Cohort’s key core competences and further strengthens the group’s long-term outlook. The positive development of the global defence and security spending outlook provides a healthy environment for Cohort’s organic development. Recent share price performance leaves significant upside to our sum of the parts-based fair value of 445p.
Interim results underpin Cohort's full-year expectations. Ongoing delays to the completion of the EID acquisition in Portugal will limit its contribution to FY16. Nevertheless, this remains a matter of timing and not value. In the meantime, the continuing activities are demonstrating solid progress. Defence trends are increasingly supportive, and were bolstered by the recent Strategic Defence and Security Review (SDSR) in the UK. The organic development should drive strong cash flow facilitating further value-creating bolt-ons. Relative to its defence peer group valuation some potential still remains.
Cohort has announced a new export contract for MASS as well as a minor delay to completing the EID acquisition in Portugal due to process issues. The latter may lead to some modest trade-off between current-year contribution and net assets acquired, but is essentially a timing issue. The additional work for MASS underpins current-year prospects, which should further support sentiment at the half year. The share price has continued to perform well, edging up to our current fair value of 395p.
Thus far in the markets, 2015 has largely been one for the brave – investing in the “internet of things” or the latest cutting edge targeted therapeutics in the world of biotech. Binary plays sold on the promise of future glory and fortune continue to attract the dizzying valuations that we have seen this year.
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Cohort is an independent technology group working primarily for defence (air, land and sea), wider government and industry clients through five subsidiaries. The group has established itself as a major provider of defence and security systems. It also operates in related markets such as transport, education and resources. FY2015 results announced in June showed record revenue £99.9m (+40%), adjusted operating profit £10.2m (+23%), PBT normalised of £10.2m (+23%) and closing cash of £19.7m, having spent £17m on two acquisitions. Subsequently, the group has acquired EID, a Portugal-based supplier of advanced electronics, communications, command and control systems for a cash-free, debt free consideration of €16m (£11.4m) which will be met from existing cash resources and additional debt facilities. The transaction is expected to be earnings enhancing in the current financial year. The group's closing order book as at 30 April stood at £134m, of which £71m represented orders for the current year. We have upgraded our FY2016E PBT normalised forecasts by 8% to £12.1m and increased our price target to 420p (300p) set in January when the share price was 235p. We reiterate our long standing buy recommendation. Interims are due in December.
Cohort is an independent technology group working primarily for defence (air, land and sea), wider government and industry clients through five subsidiaries. The group has established itself as a major provider of defence and security systems. It also operates in related markets such as transport, education and resources. FY2015 results announced in June showed record revenue £99.9m (+40%), adjusted operating profit £10.2m (+23%), PBT normalised of £10.2m (+23%) and closing cash of £19.7m, having spent £17m on two acquisitions. Cohort announced last month it had acquired EID, a Portugal-based supplier of advanced electronics, communications, command and control systems for a cash-free, debt free consideration of €16m (£11.4m). The transaction is expected to be earnings enhancing in the current financial year. We have upgraded our FY2016E PBT forecasts by 8% to £12.1m and increased our price target to 420p (300p) set in January when the share price was 235p. We reiterate our long standing Buy recommendation. Interims are in December.
Cohort’s announcement that its MCL subsidiary has been awarded an £11.2m MoD contract for tactical hearing protection is a clear signal of the inherent potential in the acquired business as part of the larger Cohort group. With the initial contract scheduled over the next four years and a further three-year option, we are maintaining FY16 forecasts during ramp-up and raising our FY17 EPS forecasts by c 2% to 26.2p. With continued growth potential across the group, our fair value increases to 395p/share.
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’s final results came in ahead of our forecasts with a record revenue, adjusted operating profit and closing cash performance delivered. The 22% underlying organic revenue growth and 17% underlying operating profit growth was augmented by the MCL and J+S acquisitions, both of which were immediately earnings enhancing. With a closing order book of £134.0m, including a contribution of £38.0m from the acquisitions, we believe Cohort is set for a period of sustained organic growth. In addition, a significant outperformance on cash, some of which is expected to partially reverse in FY16, leaves the group with a very strong balance sheet to pursue further targeted acquisitions and deliver organic growth.
