History is likely to call 2016 Cobham's (LON:COB) annus horribilis. In 2015 the future looked bright, with the company delivering its first organic growth in 10 years. However, 2016 has seen three profit warnings and both the CEO and CFO resign. Two recent acquisitions, Axell Wireless and Aeroflex, have proved extremely challenging to integrate into Cobham, taking the wireless business from a 15% margin to significantly loss making. The company is in a hiatus as it awaits new management – CEO David Lockwood (Laird) and CFO David Mellors (QinetiQ) – so 2017 could be the start of a new era.
Integration issues in wireless business
Cobham’s Q316 trading update (24 October) made painful reading after its Q116 profit warning. Management noted subdued market conditions in SATCOM and some further delays in development programmes in the Integrated Electronic Solutions business. However, the biggest issues were related to the wireless business and its processes. Wireless (c £160m revenue, 8% group) was formed from two recent acquisitions, approximately two-thirds of revenue from the former Aeroflex business and one-third from Axell Wireless. Significant integration issues occurred when the two production lines were consolidated under one management, meaning delayed shipments, operational issues and a one-off charge. Current CEO Bob Murphy thought he had largely remedied the problems during the first half, but some problems continued through Q3.
Lack of management credibility
Q4 will be crucial in proving whether the wireless business is back on track. Mr Murphy remains a believer that the wireless technology acquired with Aeroflex is crucial to Cobham’s future in a 5G world, because he, like many others, sees the different strands of communication, which are today silos, becoming more integrated as part of the Internet of Things. Unfortunately, the current management lacks credibility in the market so all eyes will be on the incoming team’s strategy statements.
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