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Questor: Cobham came close to running out of fuel but is poised to take wing again
Five profit warnings, a substantially reduced dividend and two rights issues hardly sound like a basis for an investment case. But it is always eye-catching when share prices start to rise even as the news remains bad and Cobham is showing such pleasing resilience.
Founded by the air-to-air refuelling pioneer Sir Alan Cobham, the firm’s strengths lie in its long-established positions in aviation services and defence electronics. But it lost its way with a diversification strategy that took it into commercial wireless and data communications, most notably via the purchase of an American company, Aeroflex.
Aeroflex went wrong and a vital refuelling systems contract for the US Air Force suffered delays at the same time. Cobham’s profits plunged and the over-indebted balance sheet fell apart. Hence the need for the rights issues.
A new chief executive and chief financial officer joined in December and January respectively, just as everything came unstitched. They bought themselves time by raising cash and began the turnaround process by putting the fate of the wireless and avionics communications arms (about a 10th of group sales) up for review.
August’s interims were no worse than expected, which in itself was a nice change, and the management overhaul has continued with the appointment of industry heavy-hitter Paul Kahn as head of the communications operations, which include the units that could be sold.
- Would you buy, sell or hold Cobham? Have your say in the comments section below
As with any turnaround story the risks are considerable, so the stock is suitable only for patient, risk-tolerant investors who can tough out any further turbulence.
After last week’s Accrol calamity, a careful eye must also be kept on two contingent liabilities. One relates to an investigation by the Financial Conduct Authority over a potential breach of market disclosure rules in 2016, and the other to a contractual breach that dates back several years.
A forward price-to-earnings ratio of more than 25 looks unappetising but that 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 per share in the past (on an underlying basis) and the firm does not need to get too near that to look cheap again.
Any sign of increases in the order book would be a huge plus, as it would give the new management team a much stronger foundation on which to build. In the meantime, Cobham is doing the right thing by focusing on core competencies and sorting out the balance sheet, while analysts’ earnings estimates are already ticking higher.
Questor says: buy
Ticker: COB
Share price at close: 142.7p
Update: OPG Power Ventures
OPG has done everything that we had hoped over the past three years. The Indian electricity generator has increased coal-fired capacity, broadened its portfolio of long-term supply contracts, begun to add solar capability, consistently increased sales and paid a maiden dividend.
The shares have plunged nevertheless, amid suggestions that India could marginalise coal to the benefit of solar and, more immediately, a spike in coal prices that will take a heavy toll on profits in the year to March 2018.
Futures markets suggest that coal prices are set to decline. Talk of tariff rises for OPG in 2019 could lead to a welcome bonus and make the stock look cheap on earnings, as well as assets – OPG currently trades at less than 0.5 times its book value.
However, it has net debt of £308m (plus lease commitments of £200,000). Some £36m is due to be repaid this year and the interest bill is expected to be around £38m, with lease obligations on top. Cash is just £31m, although OPG has two investments to sell. Interest cover was thin last year and will be skinnier still this year, given analysts’ consensus view that pre-tax profits will fall from £17m to just £4m.
The safest option unfortunately is to pull the plug on OPG. If coal prices start to drop we will take another look.
Questor says: sell
Ticker: OPG
Share price at close: 30.62p
Russ Mould is investment director at AJ Bell, the stockbroker
In an earlier version of this article the lease obligations were stated as £200m. We apologise for the error