Cohort kept in check by Chess

Defence technology group Cohort (CHRT) saw its shares slide 12 per cent after it reported widening losses triggered by poor performance of the two businesses it acquired within the past five years.

Although the company reported a record order book of £289m, its half-year loss widened as its surveillance, tracking and fire control software arm, Chess, reported an operating loss of £2.7m (compared with a £308,000 profit in the same period last year) as revenue almost halved to £5.9m.

Revenue at Chess, which was bought three years ago, was £9m lower than management’s expectations. Cohort chief executive Andrew Thomis attributed about £3m of this to internal issues that had caused production and engineering delays, £2m to lower-than-anticipated orders and £4m to customer-driven delays to schedules.

He argued that Chess’s issues were fixable, as they relate to consistency of delivery, performance and resource management as opposed to its technology or gaining customers. Chess’s founder Graham Beall has moved on to a business development role in the US and a new managing director, operations director, technical director and head of projects have been appointed.

EID, its Lisbon-based producer of communications systems acquired in 2016, also recorded an operating loss of £489,000, compared with a profit of £329,000 in the corresponding period last year, as revenue fell by 44 per cent to £2.6m.

Other divisions performed well, though, and its cash flow remained positive – it finished the period with net cash (excluding leases) of £6.1m.

We move our recommendation to hold from buy until there is evidence of an improvement in Chess’s performance, which led broker Investec to shave 12 per cent of its full-year earnings per share forecast, to 30p. Activity in the defence market remains buoyant, though, which gave Cohort's board the confidence to propose a 10 per cent increase its half-year dividend to 3.85p.

Last IC View: Buy, 506p, 27 July 2021