Cohort – is there a cheap bidder in the wings?

Late next month the independent technology group Cohort (LON:CHRT) will be announcing its final results for the year to end April 2022 – I am looking forward to getting them out of the way.

Why my rush?

Simply because the current year holds such good prospects enough to enable the company to show its real worth.

What is more – I continue to believe that it could well be on the ‘victim list’ of several potential predators, especially within the international ‘private equity’ sector.

The Business

The AIM-quoted Reading-based Cohort group is the parent company of six innovative, agile and responsive businesses operating in defence and related markets.

The group, which employs around 1,000 people has operating sites across the UK, Portugal and Germany.

MASS is a specialist data technology company serving the security and defence markets, focused upon electronic warfare, digital services and training support.

Chess is involved in the supply of surveillance, tracking and fire-control systems to the security and defence markets.

SEA delivers and supports technology-based products for the defence and transport markets alongside specialist research and training services.

EID designs and manufactures advanced communications systems for military and naval customers.

MCL designs, sources and supports advanced electronic and surveillance technology for UK end users including the MOD and other government agencies.

ELAC Sonar supplies advanced sonar systems and underwater communications to global customers in the naval marketplace.

Cohort was founded on the principle that SME-size businesses can prosper by being part of a larger group, where they can benefit from financial oversight, management support and the exchange of information and practices, while preserving the high growth potential of innovative independent businesses.

Sales Breakdown

In the 2021-year sales of £143m, its subsidiary performances were as follows:

MASS 27.6%, Chess 20.0%, Systems Engineering and Assessment 19.5%, EID 14.6%, Marlborough Comms 12.5%, and ELAS 5.8%.

Geographically its sales per region were UK 53.8%, Asia Pacific 20.5%, Other European Countries 16.3%, Portugal 4.4%, North & South America 4.1%, Germany 0.7% and Africa 0.1%.

The Group’s Mission Statement

The group clearly states what its management considers to be its Mission:

“To build and operate a group of companies applying advanced technology in defence, security and related markets and combining the innovation and responsiveness of smaller, independent businesses with the stability, shared knowledge, wider market access and lower funding costs of a listed group to provide enduring benefits to customers, employees and shareholders.”

The Equity

There are 41.16m shares in issue.

The larger holders include Albert Carter NE Dir (22.1%), Schroder Investment Management (12.3%), Liontrust Investment Partners (10.2%), Canaccord Genuity Wealth (8.37%), Nicholas Prest Chmn (4.35%), Herald Investment Management (3.29%), Invesco Asset Management (3.19%), Unicorn Asset Management (3.14%), Santander Asset Management UK (2.74%) and Schroder & Co Bank AG (Private Banking) (2.70%).

Recent Trading Update

Compared with 2021, the 2022 performance saw stronger performances from MCL, SEA, ELAC and MASS, offset by weaker performances from Chess and EID.

All of the group businesses are returning to normal working after the pandemic but continue to experience some impact from global supply chain issues.  The lifting of international travel restrictions has enabled access to customer premises for acceptance tests and contract negotiations.

Order intake remains strong. As a result, the group’s closing order book grew to around £287m (30 April 2021: £242.4m), of which certain orders extend out to the 2030s.

In the longer-term, as a result of the conflict in Ukraine, the group expects an increased focus on defence-related spending from governments in the region.

Andrew Thomis, Chief Executive of Cohort, stated that:

“Cohort’s performance was in line with our revised expectations for the year. Strong order intake, record closing order book and strong closing net funds provided a good start to the new financial year, and we expect to resume organic growth in 2022/23 and beyond.”

Analysts View

Analyst Andy Chambers at Edison Investment Research considers that the group is set to resume growth in its full year to end-April 2023.

His estimates for the year to end-April 2022 are for revenues of £138.9m (£143.3m), but lower pre-tax profits of £14.6m (£17.9m), earnings of 30.1p (33.6p) and a dividend of 12.2p (11.1p) per share.

The improved dividend can be seen as a pointer of better times returning.

Edison expects that the current year to end-April 2023 will see revenues jump to £164.2m, profits increase to £17.6m, earnings of 34.7p and a good 13.4p dividend per share.

Chambers has a discounted cashflow valuation on the company’s shares at 678p each.

My View

Despite the company’s various supply chain hassles in the last year, it is very encouraging to see that its order books are swelling and continue into 2031.

They have been up to 660.25p in the last year or so and as low as 440p, so I reckon that for such a quality group, the shares at the current price of 503p are on an undemanding rating.

If the market capitalisation stays this low, now £216m, I feel that the group could well succumb to a bid or two, while it is so undervalued.

(Profile 06.08.19 @ 446p set a Target Price of 607p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)