Cohort expects to profit as countries arm up

As a military technology company, Cohort (CHRT) benefits from a tense geopolitical climate. Driven by an increase in spending by the UK’s Ministry of the Defence, the company has bounced back from a loss last year and has a record order book going into the second half of this year.

The return of Chess to profitability has helped. The division, which makes surveillance and targeting devices, swung back to an operating profit of £0.3mn after making a loss of £2.7mn last year. However, Cohort expects to squeeze more out of Chess – which it acquired three years ago – given the net margin is still just under 2 per cent.

Chess is the largest division, making up 25 per cent of total revenue, so improvements there will go a long way to driving improved profitability across the wider group. The next biggest, MASS, the military data technology division, makes up 22 per cent of revenue. Its operating profit rose from £3.7mn to £4mn and saw its net profit margin rise four percentage points to 23 per cent. MASS is used for training, so the UK’s plan to grow the military will drive medium-term growth.   

Despite the stronger performance, operating cash flow fell from an £8.8mn inflow last year to a £5.8mn outflow. This was because of a big increase in working capital. Stock has been built up for second-half deliveries and will unwind in the next six months.

The record order book of £304mn, up from £291mn six months ago, means management expects medium-term organic growth. The brokers agree. FactSet consensus is for EPS to rise from 37p this year to 45p in 2024. This gives an affordable looking 2024 PE ratio of 12.4. The political industrial complex is the new central bank. Don’t bet against it. Buy.

Last IC View: Hold, 525p, 14 Dec 2021