Cobham's (COB) string of profit warnings continued last week, with new CEO David Lockwood expecting the firm's 2016 trading profit performance to be £245 million, below the range of £255 million to £275 million set out in October 2016. The new management team is commencing a thorough closing balance sheet review, including major contracts and asset carrying values. The trading profit disclosed above is before any adjustments that may arise from this review.
At this stage, we are not revising our fair value estimate of £1.64 as our full-year profit estimates were in line with the management’s revised target. For 2016, we expect trading profit to be £231 million. In our view, several adjustment factors amounting in total £240 million, like business restructuring, currency derivative adjustments, amortization of intangible assets, and goodwill impairments will drive reported operating profit in 2016 into negative territory at minus £9 million. We maintain our no-moat rating, as we do not consider the company to have a competitive advantage over its peers.
Cobham is the most technically advanced supplier and dominates the aerial refuelling systems market, with over 2,000 aerial refuelling systems delivered to defence customers worldwide for fixed- and rotary-wing aircraft, including positions on each of the next-generation aerial refuelling tankers
After paying dividends for 45 years in a row, even in years with rights issues, the board will not be recommending a final dividend payment for the 2016 financial year. In our view, this is an appropriate decision in light of the weak cash flow generation. Beyond 2016, we expect increasing profitability and returns over our 5-year forecast period as a result of end-market recovery, increased deliveries of aircraft with Cobham’s state-of-the-art air-to air fuelling systems and Radio and Audio Integrated Management Systems on all Airbus aircraft, and better integration of acquired assets. We forecast operating margins of 4.2% in 2017, expanding to 7.7% for 2020.
Using our assumptions, we expect Cobham to generate returns on invested capital including goodwill of 7.1%, on average, during our five-year discrete forecast horizon, slightly below the firm's 7.6% cost of capital.
