Acquisition Of EM Solutions Will Expand Position In Naval Communications Market

Key Takeaways

• Acquisition of EM Solutions and strategic maritime focus bolster revenue growth, benefiting from global defense budget increases and demand for naval communications.
  
• Investment in new facilities and strategic partnerships enhance market reach and operational efficiency, improving revenue and margins.
  
• The company's financial performance and growth hinge on government defense spending, timely tender outcomes, and mitigating geopolitical risks in international markets.

Catalysts

Provides a various products and services in defense, security, and related markets in the United Kingdom, Germany, Portugal, Africa, North and South America, and the Asia Pacific and Africa, and other European countries.

• The acquisition of EM Solutions is expected to significantly enhance Cohort's revenue growth by adding a substantial order book and opportunities in the naval communications market, particularly benefiting from Australia’s strategic position and connections to key industries. This is likely to impact revenue positively.
  
• The ongoing geopolitical tensions, particularly in regions such as the Indo Pacific and Europe, have increased demand for defense products and services. This external environment contributes to a robust pipeline of opportunities that could drive revenue growth in the medium term.
  
• The strategic decision to focus on maritime technologies, including advanced sonar and missile defense systems, aligns with increasing global defense budgets and offers potential for capturing larger contracts, which could improve Cohort’s revenue and margins.
  
• The investment in new facilities, such as the custom-built ELAC facility, is expected to enhance operational capabilities without a proportional increase in overhead, allowing for margin improvements through operational efficiency.
  
• Cohort's strategic focus on expanding market reach and engaging in partnerships, like the one with Terma to provide anti-missile systems, positions them to capture new market share, effectively improving revenue streams and margins through expanded offerings.

Cohort Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cohort's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.6% today to 5.1% in 3 years time.
• Analysts expect earnings to reach £16.8 million (and earnings per share of £0.49) by about April 2028, down from £19.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £22.5 million in earnings, and the most bearish expecting £13.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.6x on those 2028 earnings, up from 25.9x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Cohort Future Earnings Per Share Growth

Risks

• Although the company maintains a very strong balance sheet with low gearing, the acquisition of EM Solutions introduces some financial reliance on cash resources and bank debt, which could impact net margins if future projections aren't met.
  
• There is noted reliance on government defense spending, with the UK's defense review potentially impacting future order volumes and revenues if there are changes in defense priorities, spending delays, or policy shifts.
  
• Some divisions, specifically Chess, had production issues earlier this year affecting deliveries; if these continue, they could impact delivery reliability, revenue recognition, and undermine profitability targets.
  
• International operations and expansions, like those in the Middle East and Asia, carry inherent geopolitical risks that, if materialized, could destabilize anticipated revenue streams from export markets.
  
• While the order book is robust, the projection of further growth is contingent on multiple uncertain tenders and potential contracts; any significant delays or losses in those bids could hinder revenue forecasts.

Valuation

• The analysts have a consensus price target of £11.883 for Cohort based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £327.2 million, earnings will come to £16.8 million, and it would be trading on a PE ratio of 37.6x, assuming you use a discount rate of 6.4%.
• Given the current share price of £11.08, the analyst price target of £11.88 is 6.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.