"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, Cobhams 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. We have now had two consecutive sets of six-monthly figures that were no worse than expected.
In addition, the $455 million (£325 million) 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 9% 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 U.S. 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. Questor says Buy."
That's a big leap of faith.
It will probably take something more than the recent results to produce a lift of 50% of the pre results price. The rehabilitation has only just begun.
Care to place a timescale on your prediction?
"Cobham has taken the first step to reversing the ill-fated acquisition spree that left the aerospace and defence supplier crippled with debt, with the sale on Friday of its wireless and avionics communications testing business to US-based Viavi Solutions for $455m in cash. David Lockwood, brought in as chief executive just over a year ago to turn round the struggling defence and aerospace equipment supplier, said the disposal would leave the group in a much stronger position to be able to address core markets without distraction.
Cobham would also be able to pay off £440m of its £943m gross debt, including a significant portion of private placement borrowings in the US. However, the strategic evaluation of the groups remaining businesses would continue. This is the shape of Cobham now, he said. [But] any company that says they have finished the strategic process is probably going to die.
Cobham has been struggling to recover from its ill-fated attempt to diversify away from defence markets with the 2014 acquisition of Aeroflex, a US manufacturer of communications and connectivity equipment. The $1.5bn deal left it burdened with heavy debt and when many of Aeroflexs markets collapsed, the company came close to breaching its banking covenants. It has been forced to raise more than £1bn in two rights issues in the last two years, and has issued five profit warnings. With this sale, Cobham has exited roughly 40 per cent of the Aeroflex business, Mr Lockwood said.
Analysts were pleasantly surprised at the speed of execution, with the operations having been put on the block only last August.The disposal of the so-called Wireless and AvComm unit, which performs radio and avionic testing as well as validation services for mobile and IP networks, was what investors had pushed for, said Andrew Gollan, aerospace analyst at Berenberg investment bank. In terms of strategic moves necessary to recover this business, this is one we wanted to see to focus the portfolio, he said. It is good because they are exiting a business investors do not understand.
Some investors are likely to press the group to restart dividend payments, after suspending the payout last year. Cobham was for many years one of the sectors most consistent and highest yielding dividend payers. However, Mr Lockwood and his finance director David Mellors insisted that the discussion of how to allocate capital would not take place before the turnround was complete. Cobham intended to update investors on capital allocation by the end of the year, Mr Mellors said. Nick Cunningham, aerospace analyst, said Cobham was right to be cautious about the recovery at this stage, despite having significantly reduced risk with the disposal................."
You are probably correct, where on a day of FTSE250 fell over 230 points the specific association with Ultra markets would be expected to further depress the Cobham SP.
However, the SP decline pre-dates the Ultra announcement, and has been steadily reducing for a month, following a period of stability since the half year results. I am suspicious that some bad news has leaked out. Hopefully the soon to come trading update will prove me wrong.
SP currently at pre August half year report levels.
With a trading update due mid-November (date not yet released) the recent dive in the SP from what seemed to be a promising rise in early October seems a little suspicious. Should we be bracing ourselves for more bad news, and has that been leaked to interested parties ahead of public release? I hope not since the company is already under investigation for a similar misdemeanor.
"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. Aeroflex went wrong and a vital refuelling systems contract for the U.S. Air Force suffered delays at the same time.
Cobhams profits plunged and the over-indebted balance sheet fell apart. Hence the need for the rights issues. Augusts 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.
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. Questor says Buy (@142.7p)."
Thanks for reply. I was aware of the dates but what I fail to understand is why, given the new shares were priced at 75p, the existing shares priced at ca. 138p, did not fall to give a combined lower price to reflect the inclusion of the new shares.
Lets hope they open at a premium 1.9%not taken up is not a disaster but also I would have preferred to see 100% take up of the new shares.
Cobham plc (the Company or Cobham) announces that as at 11.00 a.m. on
4 May 2017 (the latest time and date for receipt of valid acceptances), it had received valid acceptances in respect of 669,584,312 New Ordinary Shares (representing approximately 98.01% of New Ordinary Shares offered) pursuant to the Company's fully underwritten 2 for 5 Rights Issue announced on 28 March 2017.
It is expected that dealings in New Ordinary Shares, fully paid, will commence on the London Stock Exchange's main market for listed securities from 8.00 a.m. on 5 May 2017.
It is also expected that the New Ordinary Shares held in uncertificated form will be credited to CREST accounts as soon as practicable after 8.00 a.m. on 5 May 2017, and that share certificates in respect of New Ordinary Shares held in certificated form will be despatched to Qualifying Shareholders by no later than 12 May 2017.
In accordance with their obligations under the Underwriting Agreement, BofA Merrill Lynch and J.P. Morgan Cazenove shall use reasonable endeavours to procure, by not later than 4.30 p.m. on 8 May 2017, subscribers for the remaining 13,561,228 New Ordinary Shares not validly taken up in the Rights Issue (representing approximately 1.99% of the New Ordinary Shares), failing which BofA Merrill Lynch, J.P. Morgan Cazenove and Barclays have agreed to subscribe for (or procure subscribers for), on a several basis, any remaining New Ordinary Shares.
I was referring back to the tone he set around the time of the preliminary results on 2 Mar.
In his outlook statement he said:
"The Group has many operational issues which require attention in addition to arresting and reversing the current negative performance trajectory. Some actions to address these have already commenced but are at an early stage. Some actions may also have associated costs. Given these and the issues highlighted above, the Board considers that delivery of a similar performance to that of 2016 in 2017 may be challenging."
Too many maybe's for someone who has the full picture. He had only been in harness for 2 months at that time, so can't be expected to have the full picture across such a wide spread of business. The existing management didn't seem to realise they had a problem, when they obviously did, so there will almost certainly be more difficulties yet to surface, IMHO.
They need £150M of the cash to finish the KC46 development programme. Another shinning example of how the company has been run.
I was surprised at how much discount was applied to the RI. Implies things are possibly worse than they appear, if that's possible. One of the risks stated in the prospectus is that if the RI is not successful it could lead to the breakup of the company.
Short term the SP is holding up, but it won't take much more bad news to weaken, and more bad news has not been ruled out by Lockwood in his cautious 2017 forecast.
Even if they're found guilty the fine will be chump change compared to their debt.
2 for 5 RI at 75p to raise 512m gross.
It WILL be used to pay down debt to defer the close to covenant breaching levels.
Earnings growth is required and Lockwood has already said 2017 will be at best the same as 2016.
One day the market will wake up and smell the coffee.
All IMHO WTFDIK DYOR.
"Last Friday Cobham was notified by the Financial Conduct Authority of an investigation into last springs £500 million rescue rights issue. On the same day, largely unnoticed, the US government accountability office issued its sixth report into the Boeing KC-46 refuelling tanker programme, which Cobham supplies and is at the root of much of its recent troubles.
The FCA inquiry is embarrassing but has little impact on the investment case. The US report is not all bad news for Cobham; indeed it is broadly supportive even if it is a bit startling to discover just how long the certification and conformity process is taking. The company begins to deliver the wing aerial refuelling pods for the KC-46 this year; the contract runs into the middle of the next decade, while further support and maintenance will stretch out much further.
Cobham had to raise another £500 million in a second rescue rights issue because of the long-term nature of such contracts, and the need to reassure customers the company will actually be around that long. There will inevitably be dilution of earnings, but the rights issue cuts borrowings to below twice earnings, as against an uncomfortable three times, and that ratio will reduce further this year and next as cash is generated.
The issue is at 75p. The shares added 2p to 128¾p. There is every hope that the difficult times are behind Cobham. Investors should take up their rights; if this is the end of the bad news, now could be a good entry point for new purchasers.
My advice Buy
Why Balance sheet repaired by rights issue"
And that's why I bought Cobham - in hope of such a rights issue.
On 24 March 2017, Cobham ('the Company') was informed orally by the Financial Conduct Authority ('FCA') that it was being referred to the FCA's Enforcement division for investigation in connection with the Company's handling of inside information prior to its trading update and announcement of its intention to undertake the 2016 Rights Issue on 26 April 2016.
It seems that Lockwood was right to be cautious that not all the muck had been found. Not guilty yet, but of found to be so how much is this going to cost the shareholders in fines? Perhaps just a token one? Market not too badly spooked with shares down 1.85% on the news, though it was a general down day anyway. Doubt it will help them with the next RI though.
Cobham (COB) may have suffered profit warnings at the back end of 2016 but the defence and aerospace contractor is a repair job not a turnaround story, says Jefferies.
Analyst Sandy Morris retained his buy recommendation on the stock but reduced his target price from 180p to 150p after the company gave guidance for full-year 2017.
The shares edged 0.1% lower to close at 129p on Wednesday.
With Cobhams guidance for full-year 2017 trading profit and free cashflow cautious, and not very specific, we have had to trust to our judgment and analysis more so than normal, he said.
Morris said the risks were evidence but that Cobham is not really a complex turnaround story, but a simpler repair job.
He added that he generally does not like turnaround stories as end markets and competitor actions are hard to predict and timing is uncertain, however, Cobham can be taken some way with some repairs. "
Yes, shame about some of the iii bulletin boards. Several well respected contributors have fallen silent for various reasons in the last few years. So often now, significant events go unremarked, while increasibly boards are hijacked as O/T battle grounds for sometimes quite unpleasant exchanges.
Interesting to hear your experience in dealing with Cobham. That was a while ago in context with the current situation, but if typical a good indicator of how things went bad.
Lockwood was surprised and disappointed with what his broom uncovered. Had he realised what a mess it was he might have declined the position, but he has expressed determination to sort things out.
You won it fair and square with the usual protests from U know who! ( Good to see he's still on form)
Disturbing for all iii contributors that someone like him can be banned and no reason given.
Jack also had a post removed supposedly on the whim of some complainer.
It would seem someone powerful wanted him gone (Buns that is).....I really think iii is getting worse with a lot of boards virtually dead, whilst the equivalent LSE board have maybe in some cases hundreds of posts a day......although the quality can be poor sometimes and trolling seems endemic
They sold off their test equipment UK outfit for £19m in 2013, just prior to the COB T/O.
COB paid a premium of 23% to the then current SP for a total of $920m.
They also inherited net debt of $540m for a total at the time of GBP 990m or roughly 1Bn.
Way too much IMHO.
A lot of the smart money ( I mean employees) have moved on or been forced out.
The only one's I still know working their are only staying because of their pensions and are just keeping their heads down. They are actually selling off things that they need to function effectively and this year it seems that the call went out to shore up the balance sheet at any cost.
Of course that's not Lockwoods' fault but he simply can't just turn years of mismanagement round quickly........it will take at least 3 to 5 years IMO to even stabilise things and that's assuming no more skeletons and more favourable trading conditions.
I don't really think their are any positive financial rabbits being kept in the hat, if anything the converse, it's just I really do find it puzzling why they haven't announced the terms of RI.
I obviously think things will get worse before they get better and having had some dealings with them and also a lot of friends who had and still are working their it's frustrating to actually have witnessed them walking over the cliff......but the management simply didn't listen to voices of reason on many different fronts..
They have had some complete Bozo's working for them, in many cases as contractors.
Some ten years ago now I was tech director of a small company and myself and two colleagues had a meeting with them over some proposed work. They had some sub contractor "management consultant" and we exchanged cards.
OK I've got a degree in Physics and I'm a member of the IEE.....but no big deal.
This guy's card said "MIM". I looked it up "Member of the Institute of Management" which you get by subscribing to a magazine!
Anyhow he was extremely rude ....had no clue.......and we just left and said OK go ahead and shoot yourselves in the foot.......which they did. That one little debacle ended up costing millions.
We can but wait and see.
Thanks for the BARC congrats. A fluke I assure you. As with share trades, timing is everything. Over the season I have selected close to the correct Friday crossing trade several times, just not in the correct week.
Re your thoughts on withholding price sensitive information, I strongly doubt that would be the case.
Lockwood strikes me as being a thorough and cautious operator. The reason for his cautious forward looking statement in February, the one about 2017 results not guarateed to even match the 2016 ones, is perhaps concern that he had not at that time uncovered all of the rot left by his predecessors. It might also explain the delayed RI. It would taint his credibility if, after asking for cash, he announced yet another write down on more recent findings.
I think he has a good understanding that the first rule of management is communication. I expect encouraging words from him prior to the RI announcement along the lines of what the corporate plan is to stabilise the company, and how each of the (remaining) Cobham divisions will be profitably viable in their own right.
Re your thought on Aeroflex, didn't Cobham sell off some parts of that a while ago, and haven't they just written off a huge chunk of the cost, in recognition of the poor price on the deal? I'm led to believe that most of what's left is worth keeping, probably.
Anyway, I still don't expect such a generous offer as before, and after Lockwood butters us up with a well prepared presentation I expect LTHs to be scrabbling for the offer.
A word of caution. I was wrong 2 weeks ago when I said I did not expect a further RI,so as well as this being IMHO, also DYOR.
Congrats on BARC comp......SBUK not happy.......messages relayed via proxy JD.
I agree they are probably delaying the terms and conditions of the RI and hoping for a better price.
If they are withholding price sensitive information that might cause a hike just prior to announcement then it's against the rules.....they might get away with that on AIM though!
The tipping point was the acquisition of Aeroflex for 900m.
I could have told them that but they didn't ask and anyway I know there were a lot of dissenting voices on that one but they were too arrogant to listen. They're going to find it difficult offloading that lemon for anything more than chump change.......a bit like RBS and ABN Amro only not nearly so bad in terms of money ( not billions.....just a few hundred million).
Will LTH put their hands in their pockets AGAIN and so soon?
The offer is going to have to be attractive.
Also all IMHO
Perhaps they wish to disassociate this RI from the previous heavily discounted one that was needed to stave off an immediate funding problem.
Had they gone for an immediate placing price it would perhaps have given a poor return for significant further dillusion.
By delaying, and with hopefully some better news going forward, and a possibly better SP within their declared time window,and because the cash would be used to support the business rather than to pay down debt, they will give away less stock for the cash. I don't expect a 1 for 2 deal at 89p again.
Unlike the first RI where nothing else was done to the business, not even a divi cut,I expect to hear of changes to the business, as well as a few selloffs perhaps to show how well it will be in the future, prior to the announcment.
The uncertainty over the date and conditions has added further volatility to the price with probably more upside than down, making COB good for trading at the moment.
UBS upgrade from neutral to buy. Accounts for SP rise.
Cobham is a manufacturing company i.e. they "make stuff".
Actually "stuff" that is specialised and needs money and good, highly skilled people.
The analyst at UBS has something in common with Lockwood and Mellors insofar as none of them have ever "made" anything in their lives!
RNS says they hope to complete the RI before end of Q2, no doubt at a high discount rate and underwritten.
I think we can assume a 30% dilution.
Underwriters will have some cheap stock and plenty of time to set up their short positions.
Look at the chart......increase in time in disclosed short positions.
"UBS upgraded its recommendation on shares of Cobham from 'neutral' to 'buy', hailing management's decision to address its excessively high gearing through a rights issue and 'self-help' initiatives as the "beginning of the turn-around".
The company's efforts were expected to lower net debt as a percentage of operating profits (EBITDA) down to a "more comfortable" level of 1.8 times.
Furthermore, analyst Cristian Nedelcu believed markets were underestimating Cobham's ability to improve its margins.
He estimated markets were pricing-in about 100 basis points of margin increases over the medium-term, whereas Nedelcu saw scope for 400 basis points worth of improvement which would take them to 15.5%.
As a result, starting with 2019 UBS revised its estimates for earnings before interest and taxes up by between 3.5% and 5.5% a year and for free cash flow by 18% per annum.
"We see ample room for FCF improvement going forward driven by: improvement in profitability, the non-repeat of cash outflows related to past provisions, lower restructuring cash charges as well as cash release from working capital and a normalisation of capex investments," he said."
If that is satisfactory, well what's unsatisfactory?....these people make me laugh.
They have for the last ten years been acquiring companies....operating just fine.
They move in and sack managers, replacing them with the " cobham style, face fits talking suit ".
This of course has caused them to become unprofitable and caused significant cash burn.
The " cobham ethos " has become endemic and it will take more than a few top managers to sort that out. They have lost many centres of excellence and are now selling off valuable assets in an attempt to temporarily present a false view of the true balance sheet.......which even after all that is still atrocious.
The 500m will avoid covenant breaches for the time being but as to future profitability it is merely a band aid for a terminal disease.
Factor in the trump " we want jobs for Americans " and things could get really ugly.
More bad news and it's game over. Furthermore, WRT a bid or hostile T/O who would want to take on the huge debt, pension obligations and " cobham baggage " when they could just cherry pick the assets they wanted in an Admin firesale.
Defence and security specialist Cobham (COB) faced grisly full-year results but it has still performed satisfactorily despite problems, says Jefferies.
Analyst Sandy Morris retained his buy recommendation and target price of 180p on the stock, which was trading up 4%, or 5p, at 127p at the time of writing.
The full-year 2016 results were clearly going to be grisly and probably accompanied by a rights issue - Cobham plans to raise £500 million, he said.
Nonetheless, we maintain our stance that the major setbacks were foreign exchange translation on the US dollar debt and a working capital increase in the second half of 2016. In terms of trading, the second half of the year may not have shown the hoped for improvement on the first, but our sense is that in the second half much of the group still performed satisfactorily.
He added that for 2017 Cobham should be able to deliver operating margins 2-3% higher but that is not an inspiring number. "
I agree RAC. I think it was Bill who outlined three possible strategies. I actually think that strengthening the balance sheet could be a pre-cursor to a sale (takeover). With current £/$ exchange rate, a US company could be interested in Cob. I am sure The Donald would approve.
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