In the past few months the company has won a contract worth in excess of £3m for the provision of Electronic Warfare operational support services to an export customer, and another worth £11.2m with the Ministry of Defence (MoD) to provide the armed forces with tactical hearing protection systems for the dismounted close combat user. The latest award this week is a two-year contract worth £9.7m under which Cohort's defence consultancy division will provide training and exercise support to the MoD's Joint Forces Command. Cohort has now won five successive tenders with the MoD specifically for this type of work in the past 15 years, so I wouldn't bet against the MoD exercising its option to extend the contract for another two years as well.
The contract starts in April so will have minimal impact on forecasts for the current financial year to end April 2016 when analysts expect Cohort to report a 17 per cent rise in revenue to £117m. On this basis, expect pre-tax profit to increase from £10.2m to £12m to produce EPS of 22.6p in this 12-month period. However, the growing order book is clearly highly supportive of forecasts for the 2017 financial year (April year-end) when analysts expect Cohort's revenues to rise by 13 per cent to £131m and boost pre-tax profit by a further 18 per cent to £14.2m to generate EPS of 26.2p. On this basis, Cohort's shares are rated on 16 times earnings estimates for the 12 months to the end of April 2017, but with order momentum building then the risk for an earnings beat is increasingly likely in my view.
That's because I now estimate that the latest award takes the order book above £150m, but this excludes the pipeline of work - valued at €35.2m (£23m) - which EID, a Portugal-based supplier of advanced electronics, communications and control products for the global defence market, has in its order book. Cohort announced the acquisition of EID in the summer and I covered the deal at the time ('Acquisitive growth drives re-ratings', 6 Aug 2015). The transaction is expected to complete in the coming weeks. Bearing this in mind, analysts believe that EID should be able to turn in operating profit of £1.3m on revenue of £12.7m in the 2017 financial year, so well over half the forecast uplift in Cohort's pre-tax profit for that period is covered by the contribution from EID. Moreover, the cash consideration of £11.8m payable on completion is now completely covered by cash on Cohort's balance sheet, thus avoiding the need to tap a new debt facility of £25m.
Importantly, this means that Cohort's board has ample capital available to fund the spate of new contracts, and tender for new work too, so there are no working capital constraints. It also means that if Cohort continues to convert its tender pipeline into firm contracts then the profit increase embedded in the aforementioned forecasts is going to prove far too conservative.
In the circumstances, it's hardly surprising that investors have been warming to the investment case. In fact, Cohort's shares have almost doubled since I initiated coverage at 214p ('Blue-sky buy', 6 Oct 2014). But given I feel that this earnings cycle driving the re-rating is yet to peak, I would resist banking profits and recommend riding the upward momentum in the business. Run profits.
Land sales underpin profit estimates
Cohort is not the only momentum stock I am running with. The same is true of the Aim-traded shares in Inland Homes (INL:70p), the specialist housebuilder and brownfield land developer which have more than trebled since I first recommended buying at 23.5p in my 2013 Bargain Shares Portfolio ('How the 2013 Bargain shares fared, 7 Feb 2014).
I updated the case just over a fortnight ago when I highlighted the hidden value in the company's balance sheet and the imminent move to EPRA accounting standards in the valuation of its land holdings ('Tapping into hidden value', 9 November 2015). However, there have been some important announcements from the company worth commenting on since then.
Firstly, Inland is selling off the major part of its former RAF Stanbridge site in Leighton Buzzard, Bedfordshire to Catalyst Housing Association for £14m. Completion is due by the end of the month. The site is being sold for "significantly above book value" and Inland is retaining half an acre of land where it has plans to build a 4,000 sq ft food store that has been pre-let for £68,000 a year. In addition, it is retaining a small parcel of land for its future development potential.
The benefit of the land sale is that it not only underpins analysts full-year pre-tax profit estimates of £16m for the 12 months to end June 2016, but frees up cash to reduce the finance charge and provide working capital to support Inland's housebuilding activities. At the end of June 2015, the company had gross borrowings of £56.3m offset by cash on its balance sheet of £21.4m. Net debt of £34.9m equates to 39 per cent of shareholders funds. So the cash proceeds from the site sale are significant at a quarter of gross borrowings. In addition, the company has just signed a new revolving credit facility of £20m with Barclays for its housebuilding developments and on which it has an option to draw down a further £10m if required. This will result in significant interest cost savings.
Inland is also taking a 25 per cent stake in a newly-formed upmarket housebuilding firm, Troy Homes, and making a further £2m available to it through interest bearing loan notes. The company is being led by Richard Werth, the former chief executive of Banner Homes, a premium homebuilder which was taken over by Cala Homes in March last year. Potentially, this is a smart way of ramping up Inland's housebuilding activities.
The final announcement concerns the disposal of 1.5m shares in Inland by its chief executive Stephen Wicks. I am not concerned by this announcement as Mr Wicks still retains 14.7m shares, or 7.27 per cent of the issued share capital, so has a significant financial interest in his company.
The bottom line is that I would expect Inland to offload further land holdings as the financial year progresses in order to free up cash for its housebuilding activities and crystallise the hidden value in its land. In turn, I feel that there is upside to analysts current year profit estimates. Add to that the likelihood of significant valuation gains on its land holdings when it adopts EPRA accounting standards, and I have no reason whatsoever to alter my initial target price of 80p, and a potential break-up value of 100p a share. On a bid-offer spread of 69.5p to 70p, I would run profits.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Bioquell: Buy at 137p, target range 170p to 185p ('Bug busting potential for short-term gains', 16 Nov 2015)
■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 Nov 2015)
■ AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 Nov 2015)
■ Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 Nov 2015)
■ GLI Finance: Buy at 45.25p ('High yield P2P play', 18 Nov 2015)
■ LMS Capital: Buy at 72p; Cenkos Securities: Buy at 180p ('Capitalising on tender offers', 19 Nov 2015)
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 Nov 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 Nov 2015)
■ Trakm8: Run profits at 262p ('On track for record earnings', 24 Nov 2015)
■ Walker Crips Group: Buy at 49p, target 60p ('Profit from a profit surge', 24 Nov 2015)
■ Renew Holdings: Buy at 362p, new target range 390p to 400p; Cambria Automobiles: Buy at 73p, new target 90p; Tristel: Run profits at 142p; Pure Wafer: Sit tight at 165p and await details of capital distribution ('Running small cap winners', 25 November 2015)
■ Cohort: Run profits at 418p; Inland Homes: Run profits at 70p ('Riding momentum stocks', 26 November 2015)
■ Record: Hold at 28.75p ('Record awaits the Fed decision', 26 November 2015)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
