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Cohort expects record year as global instability rumbles on


Cohort Plc AIM:CHRT, the AIM-listed defence company has had a steady year of growth and expects to deliver a record trading profit performance for the year ending 30 April 2023.

With the backdrop of a hot war on the fringe of Europe and increasingly shrill warnings about the growing military might of China, one would have expected that Cohort would have had a busy and profitable year – something the Reading-based company’s management reiterated last month.

The company has had a series of contract wins since the start of the year. As reported in the six months leading up to end-October 2022 the company announced a 194% increase in adjusted profits to GBP5m compared to GBP1.7m for the same period in 2021. Revenues grew 29% to GBP77.5m and order intake was GBP88.6m, down from GBP105.3m in the same period of 2021. The defence company closed its order book at GBP304.2m – increasing from GBP291m at the end of April, which covered 95% of consensus forecast revenue for the full financial year.

Since December, Cohort announced new contract wins for its subsidiary MASS, which provides cyber defence and electronic warfare support to maritime and air assets from the UK Ministry of Defence (MoD) of GBP8.7m over five years (as part of an existing 27-year contract with the MoD). MASS followed this up securing a GBP6m one-year extension of a contract to  the Joint Command and Staff Training, which takes the deal out to July 2025.

Cohort presence in Asia Pacific region

Cohort’s SEA (Systems Engineering & Assessment) subsidiary added to MASS’ success with a GBP26.2m contract with a foreign military for phase two of a communications systems upgrade on two naval surface vessels, which will run from May 2023 to the end of 2026.

SEA also secured a GBP7m anti-submarine warfare contract with a South-East Asian navy last month – the existential threat from China’s growing submarine fleet has left a lot of nations in the Pacific and Indian Oceans on alert.

Andy Thomis, Cohort’s chief executive said at the time: “This contract is a significant win for SEA and will deliver a modern Anti-Submarine Warfare capability with lower size, weight, and power requirements than traditional systems, and with lower through-life costs. It also expands the group’s presence in the strategically important Asia Pacific region. Together with other recent contract wins across the group, this contract further underpins our order book and enhances the visibility of future revenues.”

Unexpected outperformance

All-in, Cohort is ahead of expectations in terms of trading performance, securing higher-than-expected revenues with a strong order intake of GBP218m, compared the GBP186.7m it secured this time last year and closed its financial year with an order book of in excess of GBP325m, up 11.7% on the order book as at 30th April 2022, with the order book underpinning 84%, or GBP145m of current market revenue expectations for the year ended 30 April 2024.

The company said: “The closing net funds position was much stronger [GBP15m] than we expected and arose from timing of working capital flows in Communications and Intelligence [division] and the improved cash performance of the Chess [which provides tracking, fire control and anti-drone solutions for maritime and land platforms] business within Sensors and Effectors [division].”

Cohort reported order intake of 1.2x annual revenue “[…] and the order book of the group continues to grow and lengthen with deliveries out to 2032.”

However, the defence contractor’s performance hasn’t really been reflected in the share price. Cohort opened trading today (12th June) at 486.8p and has offered a year-to-date return of -2% and one-year return of -2% with its shares ranging between 384p and 570p over a 52-week period. The company’s market capitalisation was GBP200m.

As reported, Cohort’s other divisions are: ELAC Sonar, providing passive and active sonar systems to submarines and surface ships; MCL a communications and surveillance specialist; and EID a division that offers integrated communications systems to personnel deployed in the field.

Operational reorganisation

The company reorganised its businesses operationally, segmenting its subsidiaries into Communication and Intelligence Division, which includes EID, MASS and MCL and Sensors and Effectors which incorporates Chess, ELAC and SEA.

Shore Capital, the broker, has Cohort as a ‘Buy’ recommendation, with a target price of 610p. The broker highlights the high visibility and security of Cohort’s order book, and its consistent repeat contract wins with its existing clientele, as well as finding new opportunities in new markets.

Robin Speakman, an analyst at ShoreCap said: “Cohort is ideally positioned to see increasing momentum given the current geo-political situations in Europe and the Asia-Pacific region. We believe that European subsidiaries ELAC Sonar and EID are specifically set to benefit from opportunities in Germany and Portugal, and that the group is well-placed for increasing activity in other NATO countries and the Asia-Australasia region. With a high value-added client offering, we see margin uplift opportunities from still depressed levels relative to those achieved historically.”

Shore Capital is expecting a 20% increase in revenue from Cohort to GBP165.5m with operating profits of GBP18.6m and earnings per share up 11% to 34.5p complemented with an increased dividend of 13.4p, up 10% on the year.

Bridgewise has Cohort as a ‘Hold’, saying: “Cohort reported financial results that met industry averages, however, showed a limited correlation with outpacing its peers in the Industrials sector. The company is also a member of the Aerospace and Defense industry, which presents additional risks such as global supply chain disruptions, environmental awareness and regulation, weakness in the tourism, and a drop in demand. While investing in this company can provide a viable diversification strategy for a portfolio, it may not be the best option available.”

The company has had a strong year – probably a record year – and eventually the share price will catch up with the expectations. The longer the situation rumbles on in Ukraine, the more NATO nations will look to enhance their defence capabilities. Combined with China signalling its military primacy in the Asia-Pacific region, the next few years could be very good for Cohort.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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