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  • Writer's pictureMark Watson-Mitchell

Cohort – Advent bid for Cobham draws attention to this undervalued defence and security supplier

The ancient Romans knew the importance of a cohort. It was a military unit of six centuries, equal to a tenth of a Roman Legion.

Defence and security structures across the world also know the importance of the Reading based Cohort (LON:CHRT) independent technology group, which employs around 950 staff in its UK and Portuguese operations.

Its five divisions are integral suppliers not only to their international customers in the defence and security sectors, but also to those in the security, the oil and gas, and in the transport sectors.

The quintet of the main companies are: MASS Consultants (MASS); Systems Engineering & Assessment (SEA); Marlborough Communications (MCL); EID SA (EID); and Chess Technologies (Chess).

MASS provides electronic warfare operational support, cyber security, digital forensics, information management, law enforcement and training support to military operations business to its customers, primarily in defence and security markets globally. It made up 32% of the 2019 Group sales.

SEA is a major supplier of electronic systems for the defence, transport and offshore energy markets alongside performing specialist research and delivering services to include training and product support. It takes in communications, torpedo and decoy launching systems, sonar systems, subsea engineering, as well as signal processing and software engineering for naval combat systems, dismounted soldier operations, and automated traffic enforcement systems. It contributed 32% of FY19 sales.

MCL’s specialist C4IS (command, control, communications and computers information systems) portfolio includes hearing protection, communication headsets and radio communication devices. Its ISTAR (intelligence, surveillance, target acquisition and reconnaissance) capabilities include signals intelligence and electronic warfare systems, and unmanned aerial vehicle (UAV) and counter-UAV technologies. It handled 18% of FY19 sales.

EID is a Portuguese business, 80% owned by Cohort. It is focused on the design, manufacture and supply of advanced, high performance equipment and electronics, communications, command and control systems, mainly for the worldwide defence community. This division put in 9% of FY19 sales.

Chess, which was acquired late last year, is 81.84% owned by Cohort. It supplies to international defence forces and prime security contractors, electro-mechanical and electro-optical systems for detecting, tracking, classifying and disrupting land, naval and air threats. It was this company’s counter unmanned air vehicle system that was deployed at Gatwick last December. Only in the Group for five months of the FY19 figures it supported 9% of its total sales.

The forward order book for the Group at the year-end was an all-time high at £190.9m, supporting some £81m of current year estimated revenue. Work now contracted stretches to 2028.

Late last month MASS was awarded a £4.79m contract for electronic warfare operation support systems to protect combat aircraft against missile threat, delivery for which will take place over a nine-year period.

With 40.96m shares in issue the Company is valued at £183m.

Its largest professional holders include: Schroder Investment Management (11.0%), Hargreave Hale (10.1%), Liontrust Investment Partners (7.2%), FIL Investment Advisers (5.1%), Herald Investment Management (3.3%), Hargreaves Lansdown Stockbrokers (3.0%), Unicorn Asset Management (2.6%), and Schroder & Co Bank (2.1%).

With the Group’s Directors owning 28.7% of the equity, that means that over 77% is in firm hands, leaving less than 5m shares in the otherwise open market.

For the year to end April 2019 the Group saw revenue up from £110.5m to £121.2m upon which it made £15.9m pre-tax profits against £15.1m previously. Earnings came out at 33.6p and the dividend was 9.1p per share.

The current year estimates are for £145.7m of sales, producing £18.6m pre-tax, earnings of 35.7p and a dividend of 10.1p per share.

For 2021 £153.9m of revenue could secure £19.9m of profits, earnings of 39.2p and a very well covered 11.1p of dividend per share.

At the current 447.5p the shares of Cohort are undervalued against its peers.

However, with private equity players now eyeing the sector, as in the US based Advent International’s £4bn cash bid for the Cobham defence and security group, Cohort could look very attractive to a predator.

Only 17 times current year estimates would put the shares out at 607p, that is a good Target Price.

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