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DELAYS HIT COBHAM SHARES

09 Dec 04. The FT reported that shares in Cobham fell more than 7 per cent yesterday as the niche defence and aerospace supplier warned that delays in a key contract and problems with a development programme would hit profit next year.

The company, one of the darlings of its sector, said in a trading statement that the problems would hit margins in its aerospace systems business, which would now come in at the lower end of expectations next year. The company reiterated that its guidance for the current year was in line with a current consensus forecast for a pre-tax profit of £144.4m. It said margins in its aerospace systems business would hit 16 per cent this year.

But reaffirming the position did nothing to quell concern about next year as the shares fell 104p to close at £13.40 in London yesterday. Analysts began cutting their forecasts, which had previously produced a consensus of pre-tax profit of £162.3m. Numis said it was reducing its expectations for 2005 from £173m to £156m. ABN Amro said it expected its forecast of £173m to be cut to £165m.Shares in Cobham and its peers have benefited in recent months amid expectations of a recovery in commercial jet deliveries next year. The biggest problem facing Cobham’s aerospace business next year is the development of a fuel pump system, one of its core businesses, for Airbus’s A380 superjumbo by its FR-HiTEMP subsidiary. It said: “The programme remains a challenge and will result in lower levels of profitability in FR-HiTEMP during 2004 and 2005.”It also said delays in the finalisation of a $36m (£18.6m) US army shared contract for decoy flares would result in further start-up losses in the same time period.

Comment: Are Cobham’s days as an independent Plc in jeopardy? This is the second profit warning from the company, their first issued following worries over the tanker and Typhoon programmes (See, BATTLESPACE UPDATE Vol.6 ISSUE 35, 10th September 2004, HAS EUROFIGHTER AND TANKER DELAYS LEFT COBHAM VULNERABLE TO A BID APPROACH?) With no news on the tanker bid and with typhoon likely to be signed, there may be a dark hole in the accounts into 2005. The flare contract loss was a blow to the company and there is a possibility of the US plant closing if newcomer Armtech continues to eat into the FR market with Chemring. Mike Kelly, Armtech’s sales director was delighted to win the U.S. order from an almost standing start after the acquisition of BAE’s countermeasures business. Once Smith has digested its Medex acquisition and more is known about the tanker programme will the company make a move on Cobham now that Thales Avionics looks like going to Dassault in the event of an EADS-Thales tie up. The company has never been good at PR and is hiding a lot of gems under its bushel, the Chelton business alone generates £400m. The Financial PR gurus will now be considering a campaign in the City to convince institutions of the merits of staying independent.

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