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Questor: a resumed dividend signals better times ahead for Cobham, so we will hold on
Questor share tip: profits remain far below their peak but the company has cash on the balance sheet and the pension deficit is under control
Aviation and defence electronics specialist Cobham has failed to take flight since this column first looked at the shares in October 2017 and we are sitting on a book loss of 20pc.
But the board’s decision to resume dividend payments in 2019 suggests that investors can stick with the shares. The plan to pay shareholders 1p a share this year hints at better times ahead, especially as orders are starting to recover.
Even though 2018’s stated pre-tax profit figure of £71m stands way below the 2009 peak of £245m, we can afford to remain patient.
A dispute with Boeing over a troublesome refuelling-systems contract for the US Air Force is now resolved, the pension deficit is down to £47m and the balance sheet has more cash than debt, before accounting for the pension obligations.
That provides a safety net should anything else unexpectedly go wrong – and in fairness, we may still need one. A disappointing performance in 2018 from the Advanced Electronic Solutions arm, which provides wireless systems and silicon chips for land, air and sea-based communications systems, shows that David Lockwood, the chief executive, and his team still have work to do.
The shares remain high risk but a new strategy that targets organic rather than acquisitive growth is welcome as it allows management to focus on the turnaround plan.
Questor says: hold
Ticker: COB
Share price at close: 115.4p
Update: OneSavings Bank
We are in the money with “challenger” bank OneSavings, first tipped here late last year for growth investors (the shares already belonged to Questor’s Income Portfolio, for which we wrote an update on Friday), and last week’s full-year results and planned merger with rival Charter Court both highlight the potential for further capital gains.
OneSavings’ pre-tax profits and dividend were both ahead of analysts’ expectations. The strong results reflect how well the lender is doing when it comes to three measures that are particularly important for a bank: net interest margins, costs and bad loans.
In light of this, we may question whether there is a strong case for the all-share merger with Charter Court in a deal that will give OneSavings’ investors a 55pc stake in the new entity if shareholders approve the deal.
- Questor archive: telegraph.co.uk/questor
Yet management presumably thinks there are synergies and cost benefits to be found, and the deal provides scale in a British banking market that is mature, competitive and tightly regulated, and where there has already been consolidation in the challenger bank arena in the form of last year’s CYBG-Virgin Money merger.
The Charter Court deal also highlights just how cheap some of the challenger banks are in terms of their earnings, dividend yields and asset values. This is the result of concern over the buy-to-let market in particular, the economy more generally and thus Brexit.
But a forecast price-to-earnings ratio of barely seven with a well-covered yield of 4pc for OneSavings (on a standalone basis) appears to price in a lot of the risks and hopefully gives us some margin of safety.
Even after a gain of almost 20pc, shares in OneSavings still look cheap relative to both the company’s operational metrics and the peer group’s valuations.
Questor says: hold
Ticker: OSB
Share price at close: 397.8p
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Update: Provident Financial 7pc 2020 bond
We are still awaiting the result of the fiercely contested, and vigorously rejected, bid from rival Non-Standard Finance. But one thing shines out from Provident Financial’s full-year results: the resumption of dividends at the rate of 10p a share.
If Provident feels it can afford a dividend, the coupons on our 7pc 2020 bond are looking safe indeed, as fixed-income investors are much further up the pecking order than holders of the shares. Bondholders can now await the all-important £3.50 coupon (interest) payments due in April and October and ultimately next spring’s repayment of the bond itself.
The yield to maturity of 5.5pc will please holders and it’s just a shame that the bond matures next April.
Questor says: hold
Ticker: PFG7
Bond price at close: £101.58
Russ Mould is investment director at AJ Bell, the stockbroker. For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.