UK Edition
Questor: keep buying Cobham – time is back on the side of its management and investors
After five profit warnings, a dividend cut and two rights issues, Cobham’s full-year results were relatively quiet. That is exactly what was required as David Lockwood, chief executive, and David Mellors, chief financial officer, look to turn the aviation services and defence electronics business around.
And although it is still early days, and substantial risks remain, the turnaround story first outlined here last October (admittedly at a higher share price) appears to be on track.
We have now had two consecutive sets of six-monthly figures that were no worse than expected. In addition, the $455m (£325m) sale of the wireless and avionics communications businesses further reduces debt and takes net borrowings almost back to the levels of 2011, before the acquisition spree that unstitched the balance sheet.
Best of all, Lockwood is not lowering expectations for 2018, pending any further sales or changes to group structure.
A 9pc drop in order intake needs to be watched. Any improvement here would be a great sign. In addition, the firm is still wrestling with a problematic contract for the US air force and awaiting the results of an investigation by the City regulator into a potential breach of market disclosure rules in 2016.
A forward price to earnings ratio of more than 20 looks unappealing but it comes after five straight falls in annual profits and is based on a consensus earnings per share forecast of 5.8p. Cobham has made nearly 20p in the past (on an underlying basis) and the firm does not need to get too near that to look cheap again.
The ride could be bumpy but early signs are promising and the lower debt pile means time is no longer working against management and investors.
Questor says: buy
Ticker: COB
Share price at close: 132.5p
Update: Coats
Last June’s selection of Coats, the industrial threads maker, has got off to a reasonable start, with a 4.4pc capital gain (against a slight fall in the market), and full-year results published last month suggest there could be more to come.
The combination of higher selling prices and good cost control boosted operating margins to 11.5pc on an adjusted basis, and free cashflow improved despite increased investment in the business.
A 15pc rise in the annual dividend to 1.44 US cents was a welcome bonus, following a settlement with all three pension schemes, and it is encouraging to see that management is not resting on its laurels as a new $15m cost-cutting programme is under way.
A debt refinancing provides flexibility and, helped by December’s acquisition of Patrick Yarn Mill, the group now expects 2018 earnings to come in slightly ahead of expectations.
The shares are not as cheap as they were, at nearly 16 times forward earnings, but profit momentum seems to be gathering nicely.
Questor says: hold
Ticker: COA
Share price at close: 83p
Update: PureCircle
While it is disappointing that shares in PureCircle, the sweetener provider, have pulled back from more than 500p, they remain a third higher than when we first looked at them in early autumn and last week’s interims suggest that patience should still be rewarded.
The company started to grow sales once more, with a 13pc rise, after the lifting of a US import ban last year amid allegations over the use of forced labour (which PureCircle vigorously denied).
Profits slipped, hampered by currency movements and a transition to a new version of the Starleaf stevia plant. This is more expensive at the moment but management believes it will facilitate a substantial increase in volume production from 2018 onwards. This should bring valuable economies of scale, helping costs and boosting margins.
The danger is that any further near-term stumbles leave the lofty valuation exposed as forecast profits of just under $9m for 2018 compare with a market value of £740m. There is also no dividend. There is little margin for error but there is still huge potential here for long-term growth seekers.
Questor says: buy
Ticker: PURE
Share price at close: 427.5p
Russ Mould is investment director at AJ Bell, the stockbroker