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Cobham Finds A Road To Potential Recovery By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

cobhamWith apologies for these comment coming 24 hours after the event due to my being away but having been so unusually critical of the hitherto successful UK based defence and communications contractor, Cobham back in May this year, it is surely right that I should not ignore some interesting events that have occurred at Cobham. Prime amongst these is that Cobham has at last parted company with Bob Murphy as CEO and replaced him, from the end of this year, with David Lockwood, currently CEO of technology company Laird Group.

Together with the previously announced appointment, also from the end of this year, of David Mellors as the new Chief Financial Officer the hope will be that these two will be able to rebuild the fortunes of Cobham into a strong group of primarily defence and communications based interests and reverse the sad period of lost confidence by the investment community that in turn saw the shares and value of the company fall by 40% this year, at least until the 5% rise in the share price that occurred yesterday and that followed the management change announcement.

So who is David Lockwood? Formally vice president of global defence and security at BT Global, Mr. Lockwood has spent part of his career with BAE Systems, Thales and a company called GPT, which had originally been formed and owned jointly owned by GEC and Siemens until the renamed Marconi acquired the remaining 50% from its partner. With defence and communications being part of his career and having steered Laird Group to further success I am not surprised that investors have welcomed the announcement of his appointment.

I wish both the new CEO and CFO the very best in their respective new roles at Cobham and I have more than a degree of confidence that they will quickly begin a process that will lead to an upward revaluation of Cobham shares. That is not something I would usually say but after the wreckage that the immediate former management created I do believe that in the new generation of management Cobham has found a road to recovery and revival of potential success that has alluded it for too long.

There is a very big job to be done and confidence can never be rebuilt overnight. That job will not only be to repair damage done but maybe also to formulate a new strategy that can take the company forward into a new ea. Cobham has significant US based interests and while some may be a challenge there are others that have not lost the mark of success. The same argument applies of its interests here in the UK as well.

But despite the pleasing announcement of much needed management changes, there remain as far as I am concerned one or two loose ends that may also need to be tidied up in due course. For instance, while the problems that surfaced within Cobham and that led to two successive very significant profit warnings plus the need to surprise shareholders by presenting them with a £500 million rights issue earlier this year, investors have a right to know whether Cobham’s chairman, John Devaney, acted quickly enough to arrest what was clearly a fast worsening situation.

We also need a better answer than the one that we got in respect of why, during the rights issue announcement. Mr Devaney said that the company had no intention of suspending the dividend. In saying this, let me remind that the dividend paid in 2015 cost the company £126 million, a figure that represented no less than one quarter of the £500 million rights issue money being raised from shareholders? What sense is there in that?

Finally, I would like to know what the chairman and non-executive directors were doing when the problems first surfaced? Had they been given all the facts or was the wool being pulled over their eyes? And if they did have the facts of the worsening situation why did they continue to place so much faith in the two most important members of the Cobham board – the CEO and CFO – for so long?

Given that so many of Cobham’s problems relate to a defence diversification acquisition strategy that was directly created by CEO Bob Murphy and given that such strategy was clearly agreed to by the Chairman and other members of the board, quite frankly I find it rather odd that Mr Devaney, along maybe with some other of Cobham’s non-executive directors, have not also offered to resign. I get the need to achieve short term stability until the two new senior management incumbents arrive, but I do still hope that we might see a few more board changes announced sometime next year.

Following the resignation in January 2016 of Chief Financial Officer Simon Nicholls, the two profit warnings that occurred in a relatively very short space of time and that related predominantly to acquisitions made by Chief Executive Officer, Bob Murphy and the subsequent sacking by Cobham of two senior directors of its wireless division, (the latter reasoned I believe as a direct result of revenue issues that triggered the need to take a £9 million charge against 2016 profits), I am bound to be concerned about the wisdom of Mr Devaney decision as Chairman to retain persist with the services of Mr. Murphy, the instigator of what now looks to have been a flawed strategy, under whose watch as CEO the problems occurred.

For the record Cobham recorded a pre-tax loss of £39.8 million for FY15. This was followed six months later by the announcement of first half 2016 losses of £38.4 million. Just how much of the £78 million of losses racked up by Cobham over an eighteen month period not to mention the need to call on shareholders for £500 million to bail the balance sheet out is due to businesses acquired by Mr. Murphy as he attempted to diversify the company toward commercial communications and microelectronics may never be known. But it is clear that the acquisition of Aeroflex in the US has played a very big part in the problems Cobham has subsequently suffered. Not only did this large acquisition increase Cobham’s borrowings significantly it looks to me that at a cost of $1.5 billion, inclusive of debt, Cobham paid too much. Why is it I wonder that Cobham reminds me so much of the final demise of Marconi?

For all that, l doubt that Cobham’s new team will wish to dump all of the strategy put in by Mr. Murphy during his tenure in office. There is great benefit of not being solely reliant on one single area such as defence. And it may be interesting to note here that Laird Group is today a very different company to the engineer that the one that I had on my list as an analysts twenty five years ago. I suspect that there are few in Laird today that remember this was for many years the parent company of Metro-Cammell Weymann.

I wish the new team when they arrive at the end of the year very well and I hope that the new broom they bring with them sweeps aside any remaining hangers-on that had a hand in bringing Cobham down to the low state that it has been in over the past few years. Am I confident that the new management will reverse the fortunes of Cobham? Assuming nothing else occurs between now and then, yes I certainly am.

CHW (London – 18th August 2016)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710-779785

 

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