The FY16 profit warning and rights issue announced with the Q1 trading statement reflect the limited progress Cobham (LON:COB) has made in recent years. The main problem appears to be a lack of core organic performance and reliance on an M&A-driven strategy to instil growth. These are similar criticisms to those levelled at previous management teams. Cobham now appears vulnerable as the technology positions and assets are attractive, but it looks like a slow process to drive value recovery in its current form.
Profit warning
While only reducing FY16 management expectations by £15m, the Q1 profit warning has an unfortunate resonance. Following a major acquisition, parts of both the acquired and ongoing businesses have performed poorly and reduced overall expectations. As a result, elements of organic growth go unrecognised and unrewarded. Unfortunately, this was a shortcoming of Cobham in previous guises; remember Westwind, SPARTA and others. Since 2011 the current management has spent over £1bn net on M&A. In that period, underlying EPS has declined by 12%, DPS has increased by 75%, cash conversion has fallen from 95% to 71% and net debt has risen 5.7x to more than £1.3bn. Of course, not everything has been under management’s control, the core issue of defence spending weakness being a case in point, and management has done well to respond to the challenges in its key market. In our view it is time for a fundamental shift in strategy and philosophy for creating value, possibly entailing at least a partial break-up to focus on core growth potentials that do exist. The order book is ahead at the end of Q1, both in Wireless where the largest issue arose in the period, and for the group overall.
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