COBHAM – FEELING THE PINCH BUT STILL LOOKING AHEAD
By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.
07 Aug 14. Large, diverse and, due to the wide range of aerospace, defence, communications, space and security technology activities, understandably complicated Cobham is not a company that I have actually written on for several years. It is however one that I have known and respected for a very long time and one that also has an excellent record of adapting to change.
Well received by investors this morning notwithstanding reporting a further sharp fall in underlying revenue plus a 14% decline in profits (this comes on top of the 4% underlying but 38% decline in statutory pre-tax profits reported for FY13 back in March) there can be no hiding that the latest set of interim results from Cobham does make disappointing reading. Nevertheless, there are some interesting and more positive pointers to be found in these results not last that with a strong bias toward second half performance full year guidance given back in March has remained unchanged. Indeed, if as I do you are to see the current year as one of rebalancing it is probably also right to conclude that Cobham is now through the worst.
As with many other UK based companies with large scale activities based abroad the negative impact of currency translation is very noticeable in the latest set of results as I suspect it also will be in the second half. Reported earnings per share actually declined 16% but to show the impact of currencies the company states that on a constant exchange rate basis the decline would have been 12%.
Thankfully it certainly isn’t all bad news from Cobham and three positive factors stand out from these results. Firstly, reflecting what appears to be a greater degree of underlying confidence most likely built around achieving a far better balance of group activities, the interim dividend is raised from 2.64p to 2.904p. Secondly, on the back of more than half decent free cash flow, I note that net debt is down from £453m at last year end to £313m at the half year period end. Thirdly, reflecting the continuing shift towards a more balanced portfolio, while defence activities are down it is noticeable that commercial aerospace activities have actually grown.
Cobham first half results show that in revenue terms ‘Commercial’ activities now represent 38%, that US defence and security account for 34% and those categorised as ‘Non-US defence and security’ 28%. Defence Systems has been renamed and the new operational structure consists of four sectors, Communications and Connectivity, Mission Systems, Advanced Electronic Solutions and Aviation Services. While the trading margin fell in all four sectors overall guidance is maintained with a greater than usual weighting of earnings and cash generation toward the second half.
Cobham is, just as most other defence companies based in the mature western world have also been forced to adapt to a changing world order in which defence spending has been placed lower down the pecking order, been forced to adapt. But while adapting to changing markets comes at a cost and expectations have of necessity to be reduced the core business activities of Cobham have remained strong.
In its chosen highly specialist fields there can be little doubt that Cobham remains a strong global player and one that is not only ever more efficient at what it does but that remains very content to continue investing in its own future. Note, no cut backs in research and development spending at Cobham, in fact the opposite is the case. All in all and despite the obvious disappointment of seeing a further regressive six month results performance I for one remain confident about the groups’ ability to ride through what has and remains a difficult storm to navigate through.
Looking back to a time when I was a professional equity analysts covering defence and aerospace, something that I had the pleasure of