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OPINION

Armed for success

Armed for success
October 23, 2014
Armed for success
243p

I advised buying the shares earlier this month at 215p ('Blue sky buy', 6 October 2014), partly because the share price appeared on the cusp of a major break-out, but also because the fundamental case for investing was equally sound. At the time the company was being rated on a modest 11 times historic earnings and offered a decent 2 per cent dividend yield even though analysts at broking house Investec Securities believed that with very little risk to earnings, a recently announced cash funded acquisition would enhance Cohort's EPS by 5 per cent in the current financial year to end April 2015, and by an eye-catching 15 per cent in fiscal 2016.

It is clear that the growth is not only going to come from M&A activity. Indeed, Cohort has just announced a major contract win with defence group BAE Systems worth £23m in revenues over the next couple of years. The company’s advanced surveillance systems and software business SEA is already under contract with BAE Systems to provide external communication systems (ECS) for five Astute-class submarines. This latest award extends the system to other submarines under the Royal Navy's command as well as further Astute boats. Moreover, a further significant order for the ECS system on Royal Navy submarines is expected in 2015. This reflects the fact that the technology allows new communications equipment to be fitted much faster and at significantly lower cost than earlier generations.

It’s an important contract win as it underpins SEA’s revenues. The division accounted for £3.8m of Cohort’s operating profit of £9.8m (before accounting for central overheads of £1.6m) and 40 per cent of the company’s total revenue of £71.6m in the last financial year, so this is a significant contract win for a major income generator. It also offers revenue visibility over the next few years.

Earnings upgrades possible

Ahead of the half year results in mid-December, analyst Chris Dyett at Investec expects revenues for the 12 months to April 2015 to rise a third to £95.5m and operating profit to rise from £8.2m to £9.7m. The respective figures for fiscal 2016 are revenues of £102.7m and operating profit of £11.4m. However, I feel that the risk to estimates is firmly to the upside if Cohort maintains the pace of new contract wins. The BAE deal was the second major contract win this month alone. That’s because the profit uplift in those forecasts over the next few years is largely accounted for by two earnings enhancing acquisitions Cohort has made over the past few months.

It's worth flagging up again that the profits from acquisitions will help Cohort's board fund its progressive dividend policy and one that has seen the payout double since 2010. Investec expect a dividend per share of 4.9p a share in the current financial year, rising to 5.6p in fiscal 2016. On this basis, the prospective yields are 2 per cent and 2.3 per cent, respectively.

So with both profits and dividends set for significant growth, it’s hardly surprising that the shares have surged through the 225p resistance level to take Cohort them into blue-sky territory. They are also making decent headway towards my 300p six-month target price. Buy.

Please note that I have written two other columns today, both of which are available on my IC homepage...

I have also written three articles in the past week on financial markets:

Equities: Eurozone growth scare spooks investors (13 October 2014)

Monetary policy: Normalisation is coming so plan ahead (17 October 2014)

Bond markets: Lessons to learn from bond market flash crash (17 October 2014)

 

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'