Cohort benefits from increased UK military spend

Cohort (CHRT), the Aim-traded defence technology business, has been slower to see the benefit of the uplift in defence spending by European governments than peers such as BAE Systems (BA.) and Qinetiq (QQ.).

Yet the company is now showing signs of progress. Top-line growth of 33 per cent was attributed to a “significant uplift” in orders from the UK’s Ministry of Defence (MoD), particularly for its MCL business, which provides communications and surveillance technology. 

The amount of revenue Cohort generated from the MoD increased by 50 per cent last year, to just below £100mn. It now earns 54 per cent of revenue domestically, which it described as “a marked change” to recent years, where the proportion of revenue earned at home has generally been falling. 

This top-line growth fed into higher adjusted net profit, which grew by 23 per cent to £19.1mn, although margins were weaker across both its communications and intelligence (C&I) and sensors and effectors (S&E) units. 

In the C&I arm, where adjusted operating margin fell by 60 basis points to 17.3 per cent, this was due to ongoing delays in the Portuguese Navy’s ship procurement programme, which meant Cohort's EID business posted a “small” operating loss. It expects orders from this to flow more freely this year. 

In S&E, the margin fell by 110 basis points to 9.7 per cent, with its ELAC business not generating as much profit becasue a contract to provide sonar equipment on new submarines for the Italian Navy is still in the design phase, although again profits should improve once production kicks off. There were also signs of improvement in its previously underperforming Chess surveillance equipment business. Finance director Simon Walther said he expects the S&E margin to recover over the next three to five years to around 14-15 per cent. The C&I margin will remain in the high teens, he added.

Encouragingly, orders grew at a faster pace than revenue, and with a further £60mn of orders since its April year-end around 90 per cent of this year's forecast sales are now covered. Broker Shore Capital expects earnings per share to weaken slightly this year, by around 1.4 per cent to 36p, as the company steps up capex to replace a leased facility in Germany with its own factory. Yet even with a 10 per cent post-results rise, Cohort’s shares trade at 13.6 times earnings, marginally below their five-year average. The company’s encouraging prospects mean we maintain our buy stance.

Last IC View: Buy, 443p, 14 Dec 2022