Cobham (LSE:COB) is Britain’s third-biggest defence and aerospace group after Rolls-Royce and BAE Systems. With Rolls-Royce working through the fallout of a turbine blade cracking problem, I decided to look at how Cobham is faring.
In 2016, after a dreadful run of profit warnings, a Financial Conduct Authority investigation (which was subsequently dropped), rights issues and legal disputes, Cobham stopped issuing its dividend following a 40-year run. That must have been a painful decision. Thankfully, this March, the company announced it was ready to reinstate a progressive full-year dividend of 1p. The dividend cover is 3, which makes it unlikely that the company will cancel this payout again soon.
Interesting and complex
Cobham employs around 10,000 people globally, in advanced areas of engineering expertise, carrying out complex technological advancements and services to defence, aerospace, commercial and security markets.
The company is highly regarded for its air-to-air refuelling technology, software development instruction simulators, satellite communications, defence electronics, aviation services and software products. Creating exploration solutions in some of the most remote parts of the world, including the oceans and outer space, it’s an interesting company, with an impressive catalogue of abilities.
Lacklustre financials
Yet when I began looking at the financials for Cobham, they didn’t bowl me over. A trailing price-to-earnings ratio of 34 is high, which means market sentiment has improved and investors are expecting higher growth from the firm, but also that it could be overvalued at its current price. Earnings-per-share growth was negative at the end of 2018 at -19%, which is considerably lower than the -8% in 2017. This was mainly due to £5.5m lost through exchange rate fluctuations and £22.5m lost from selling off business interests.
US subsidiary, Advanced Electronic Solutions, had been underperforming and was subject to a cost-cutting plan, with anticipated savings of $20m for 2019.
In February, Cobham announced a settlement with Boeing over a dispute regarding delays with its KC-46 tanker programme. This will costs Cobham £160m, which will continue to weigh on cash generation through 2020. Excluding the Boeing dispute, at least its Mission Systems division was performing strongly, with a 15% increase in organic revenue through the aerial refuelling, pneumatics and actuation markets.
Underlying operating profit and revenue fell last year, but there was some better news. I think its debt ratio of 54% is fair for this industry and not worrying and gains in the order book and free cash flow were better than expected in 2018.
Confidence in control
CEO David Lockwood has been in charge since 2016 and comes with a wealth of relevant industry experience. He took over after the board had undergone a serious shake-up and has steered the company through choppy waters, with the horizon finally in sight, even if we can’t fully call the recovery just yet. Newly elected Chairman Jamie Pike brings a decade of defence industry experience to his role and a very impressive CV. I have faith that the collective experience of the board can continue to push the business in a positive direction.
Barring any unexpected problems, I think Cobham should continue along the recovery path, but the Boeing settlement will constrain cash flow for some time. I believe the company is still a long way off its previous highs. As far as Defence and Aerospace companies go, I’m inclined to favour BAE Systems over Cobham.
