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By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

08 Aug 13. Given ongoing uncertainty particularly within US defence markets Interim results from Cobham this morning are reassuring. This is well managed company with an increasingly broad and diverse portfolio product mix split between defence and commercial. Whilst the earnings outlook will no doubt continue to be constrained by mature market defence cuts I believe that the overall outlook for a diverse international technology company such as this and one that in this case continues to place strong emphasis on R&D investment remains excellent.

Net of acquisition and divestments group revenue was broadly similar to that of 2012. Underlying pre-tax profits was down 8% but with strong cash flow and net debt of £359m producing a comfortable gearing level of 34% the balance sheet of Cobham continues to looks excellent. However, as had been indicated in FY13 outlook statement, reduced US defence and security volumes together with portfolio change has adversely impacted on the underlying trading margins but at 17.8% these are in my view still to be considered as strong. Boosted by a 27% increase in order intake Cobham move forward into the second half period with and order backlog of £2.5bn. The dividend is raised 10% and while there has been no change in guidance for the full year the company is indicating the potential for modest organic growth in 2014.

These are difficult times for any company engaged either directly or indirectly in defence and security. But while Cobham has not escaped the impact of defence cuts it has for some time been seeking to improve the balance of defence with other commercial activities. Thus the he impact from reduced defence market activity has I believe been reduced.
It is about six years since I last chose to write on Cobham and high time that I put that situation right with a somewhat longer than normal commentary. So what does this fine company do? Cobham operates in three broad and specific market segments: US defence/security (38% of sales), non-US defence/security (26% of sales) and commercial (36% of sales). The latter comprises aerospace, marine and land/industrial markets. Cobham describes its activities on its website as offering an innovative range of technologies and services to solve challenging problems across commercial, defence and security markets, from deep space to the depths of the ocean. In our language that converts to this being an international company having market leading positions in air-to-air refuelling; aviation services; audio, video and data communications, including satellite communications; defence electronics; life support and mission equipment.

Cobham is in my view a strong well managed company with a long and successful record of adapting to changing circumstances. Operating cash flow conversion last year was 104% and at 84% in H1 this continues to look very healthy. Note also that last year the ‘Excellence of Delivery’ cost efficiency programme delivered £48m of savings and that this year the company expects to add an additional £19m of cost and efficiency savings.

Being hugely important in how I judge company performance one notes that R&D investment, including customer funded projects, has remained very strong at £85m during the first half period (FY12-£66m) and that as it had last year this included significant development work on aerial refuelling programmes. Worth noting too that during FY12 research and development investment, including customer funded projects, had been £156m – up from £135m in FY11 and that in addition to aerial refuelling company funded investment, or Private Venture investment had been £75m (2011-£75m) which represented 5.3% of total group revenue. In my book that is an excellent figure.

In Defence and Security activities Cobham will continue to move forward with a range of what it terms different

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