Rising Global Defense Budgets Will Expand International Markets

Key Takeaways

• Global defense spending and digital modernization drive strong demand for Cohort's core secure communications and electronic warfare solutions, supporting robust order growth and margin expansion.
  
• Increased R&D and successful acquisitions broaden market reach and capabilities, especially in naval and AI-driven defense technologies, fueling further revenue and earnings growth.
  
• Heavy reliance on key contracts, government spending, and successful acquisitions, alongside operational inefficiencies and shifting geopolitical factors, creates ongoing risks to sustainable growth and margins.

Catalysts

About Cohort

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.

What are the underlying business or industry changes driving this perspective?

• Cohort is experiencing robust forward demand due to a global surge in defense budgets and heightened geopolitical instability, especially across NATO, Europe, and Asia-Pacific, leading to a record order book that covers ~85% of next year's revenue and underpins strong future revenue growth.
  
• Sustained government investment in digital transformation and electronic warfare is driving a pipeline of orders for Cohort's core areas-secure communications, cyber, and advanced data analytics-providing opportunities for higher-margin contract wins and supporting net margin expansion in coming years.
  
• Meaningful increases in internal R&D investment (up 35% YoY) are fueling product innovation in priority markets like AI-driven counter-drone systems, electronic warfare, and secure naval communications, which should boost Cohort's addressable market and earnings potential as modernization and technology adoption accelerate globally.
  
• Proven ability to execute and integrate value-accretive acquisitions, exemplified by EM Solutions and ITS, is expanding Cohort's presence in international defense markets and communications technology, unlocking cross-selling, operational synergies, and further top-line revenue growth.
  
• The continued global prioritization of maritime security-especially protection of critical sea lanes and submarine detection-directly benefits Cohort's specialized naval solutions (SEA, ELAC, EM Solutions), which positions the company to win a growing share of new high-value, multi-year international defense contracts and improve revenue visibility.

Cohort Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Cohort's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 8.7% in 3 years time.
• Analysts expect earnings to reach £29.4 million (and earnings per share of £0.69) by about September 2028, up from £19.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.7x on those 2028 earnings, up from 30.9x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Cohort Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

• The company's net margin declined slightly this year (from 10.4% to 10.2%) and was negatively impacted by operational inefficiencies in Chess and low-margin contracts at SEA; persistent issues in project delivery, supplier relationships, or undertrained staff at critical subsidiaries like Chess could lead to ongoing profitability pressures and margin erosion, impacting net earnings.
  
• There are significant dependencies on large contracts (such as the one-off Royal Navy Ancilia order), UK government spending, and the maritime sector; if UK defense budgets are reprioritized, cut, or major programs delayed or canceled due to political or fiscal shifts, this concentration exposes Cohort to revenue instability.
  
• Rapidly evolving competitive dynamics in counter-drone, AI, and cyber domains-with rising numbers of specialist players and new entrants (e.g., Anduril's UK presence)-could erode Cohort's market share, increase pricing pressure, and affect both order intake and long-term revenue growth if Cohort fails to keep pace on innovation.
  
• Ongoing and future performance improvements depend significantly on successful integration of recent and future acquisitions (e.g., EM Solutions, ITS); failures in integration, or difficulties managing geographically distant or culturally different businesses, may prevent realization of expected synergies and drag on group earnings and profitability.
  
• Political volatility and shifts in international alliances-such as uncertainties around the AUKUS agreement, US policy reversals, and changes in NATO defense commitments-risk destabilizing anticipated demand growth for defense technologies and may result in unpredictable delays or reductions in Cohort's order book and future revenues.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £18.067 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 £339.1 million, earnings will come to £29.4 million, and it would be trading on a PE ratio of 42.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of £13.06, the analyst price target of £18.07 is 27.7% higher.
• 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.