Shares of defence group Cohort (LSE: CHRT) edged lower on Thursday after the manufacturer of electronic and software systems revealed a mixed picture of underlying growth and one-off costs.
Cohort’s adjusted pre-tax profit rose by 21% to £14.5m last year, but the group’s statutory pre-tax profit fell by 81% to £1m. These figures translate into adjusted earnings per share of 27.9p and statutory earnings per share of 9.1p.
If you’re a shareholder in the group, you may wonder which of these figures you should rely on. Having looked at the figures, I’m inclined to accept the adjustments, most of which relate to acquisitions and genuine one-off costs. On that basis, today’s figures give Cohort a P/E of 15. The dividend has been increased by 18% to 7.1p, giving a trailing yield of 1.7%.
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One of the reasons I’m prepared to accept the firm’s adjusted earnings is that management has a fairly good record of making successful acquisitions. Since 2011, sales have risen by 72%, while earnings per share have risen by an average of about 20% each year. During this time, the group hasn’t issued many new shares and has maintained a net cash balance.
Although revenue was flat at £112m last year, the firm’s order book grew by 18% to £136.5m. Sales and profit growth can often be uneven at this type of business, as the timing of contract wins isn’t always predictable.
Analysts remain bullish on this stock and expect the group’s adjusted earnings to rise by at least 10% this year, putting the shares on a forecast P/E of about 14. I’m encouraged by the strong order book and believe Cohort’s long-term growth potential is attractive.
Pumping out cash
Software group Netcall (LSE: NET) makes customer relationship and workforce management systems. This £94m business is increasingly focused on selling subscription services which provide a high level of recurring revenue.
During the first half of this year, the order book rose by 14% to £16.6m, while annualised recurring revenue rose by 8% to £11.3m. That represents about 65% of the group’s forecast revenue for the current year.
Pre-tax profit rose by 17% to £0.92m during the first half, lifting earnings per share by 7% to 0.6p. However, the biggest attraction for me is the group’s apparent ability to generate cash.
Netcall’s free cash flow was £1.7m during the first half of this year, more than 25% higher than during the same period last year. This strong performance meant that despite an increase in development expenditure, net cash rose by £0.5m to £14.6m.
The company’s strong first-half performance is expected to continue. Broker forecasts indicate that earnings per share should increase by 63% to 2.15p for the year ending 30 June. A bumper dividend of 3.8p per share is expected, giving a yield of 5.6%. Although this level of payout may not be sustainable, I think it’s good discipline for management to return surplus cash to shareholders in this way.
Netcall seems a solid business to me. The only catch is that the firm’s shares are already priced for success, with a 2018 forecast P/E of 28. In my view, shareholders should definitely continue to hold, as more growth may be in the pipeline. But new investors may want to wait for a dip before buying.
