Cohort Share Blog – Interim Results Year Ending 2020

Cohort has now released their interim results for the year ending 2020.

Revenues increased when compared to the first half of last year with the maiden £13.9M from CHESS, a £3.8M increase in MASS revenue, a £2.4M growth in EID revenue and a £1.5M increase in MCL revenue, partially offset by a £528K decline in SEA revenue.  Cost of sales also increased to give a gross profit £7.9M higher.  Amortisation increased by £1.4M but there was no reorganisation costs, which were £500K last time.  Other admin costs grew which meant the operating profit showed a £2.3M improvement.  Finance costs increased by £322K and tax charges were up £228K to give a profit for the period of £407K, an improvement of £1.8M year on year.

When compared to the end point of last year, total assets increased by £1.9M, driven by a £5.7M right of use asset, a £1.2M growth in property, plant and equipment, and a £900K increase in goodwill, partially offset by a £3.7M decline in other intangible assets and a £1.3M fall in receivables.  Total liabilities also increased during the period as a £2.3M decline in payables and a £907K decrease in deferred tax liabilities were more than offset by a £5.8M lease liability, a £1.2M increase in current tax liabilities and a £912K growth in provisions.  The end result was a net tangible asset level of £15M, broadly flat over the past six months.

Before movements in working capital, cash profits increased by £4.3M to £4.8M.  There was a cash outflow from working capital but this was less than last time so after there was a £1.4M swing to a tax receipt, the net cash from operations was £4.8M, an improvement of £8.7M year on year.  The group spent £1.8M on capex to give a free cash flow of £3M.  Of this, £2.5M was paid out in dividends and a net £726K was spent on their own shares which meant there was a cash outflow of £260K and a cash level of £18.4M at the period-end.

The operating profit in the Chess business was £1.8M.  This was its first contribution with good contributions from sales of its counter-drone systems to military customers in the US and Norway.  The business also completed deliveries of naval systems for both the UK and export customers.  The order book of £16M along with good short-term order prospects give the board confidence that the business will have a profitable second half.  Long-term prospects for naval, land and counter-drone systems remains strong. 

The operating profit in the EID business was £56K, an improvement of £330K year on year.  The stronger performance was mostly in its Land division, delivering the first part of a large order to a Middle East customer.  The mix of work, with lower naval systems activity, and further investment in the new vehicle intercom systems account for the lower margin.  The business is expected to have a stronger second half as it delivers against contracted orders.

The operating profit in the MASS business was £3.8M, a growth of £1.6M when compared to the first half of last year.  The higher revenue was a result of work starting on new electronic warfare operational support projects for export customers.  Following significant order intake in 2019 the business secured further renewals in the first half of the year and the board expect it to maintain its order book into 2021.

The operating profit in the MCL business was £468K, an increase of £436K when compared to the first half of 2019 as a result of increased activity in supplying equipment to the UK MOD, particularly the Royal Navy.  The order book increased by £3.2M and a good pipeline of opportunities give them confidence that the business will have a stronger second half. 

The operating loss in the SEA business was £302K, a deterioration of £683K year on year.  The combination of lower revenue, investment in its products, particularly its anti-submarine warfare Krait Defence System, and extensive bidding activities on export opportunities for naval systems account for the weaker performance.  They expect this investment to deliver stronger order intake in the second half, providing good underpinning for 2021.  The closing order book declined by £6.1M and the board expect the business to be profitable in the second half, similar to last year.

Going forward, the year has started well with over £77M of orders secured and they expect a similar second half for order intake.  They expect these orders to include first steps in some key markets and programmes which will provide good revenue streams for many years to come, particularly at SEA and Chess.  The board expect a stronger performance in the second half but they still need to win and deliver some important orders to achieve their targets for the year.  Overall, the board expects the performance to be in line with market expectations. 

The acquisition of ELAC will add a profitable and growing sixth stand-alone business.  It furthers their strategy of expanding in defence products and export markets, particularly the naval sector.  The naval export markets the group is focused on are expected to reach $150M of spend over the next decade in the Asia Pacific region alone.

At the current share price the shares are trading on a PE ratio of 37.1 which falls to 20.4 on the full year forecast.  After a 12% increase in the interim dividend the shares are yielding 1.2% which increases to 1.4% on the full year forecast.  At the period-end the group had a net debt position of £6.8M compared to a net debt figure of £6.4M at the year-end.

On the 12th December the group announced that it had agreed to acquire ELAC, a German-based market leader in naval surface ship and submarine sonar systems for €11.3M.  Last year the business made an EBIT of €1.4M and has a pension scheme with a deficit of €7.1M. 

Overall then this seems to have been a period of decent progress for the group.  Profits improved, although the group is not that profitable really.  Net tangible assets were flat and the operating cash flow increased, generating some free cash.  Most of the businesses seem to be performing well, and Chess seems a good addition, although SEA struggled.  This is expected to improve in H2, however, and the group performance overall is expected to improve too.  This positive news may already be priced in, however, with a forward PE of 20.4 and yield of 1.4%.

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