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Defence stock Cobham drops 20% after fifth profit warning in 15 months

The FTSE 250 defence group has warned that it cannot yet give guidance on how it will perform in 2017.

Gary Jackson

By Gary Jackson, Editor, FE Trustnet
Thursday February 16, 2017

UK aerospace group Cobham has issued its fifth profit warning in less than two years, leading to a fall of more than 20 per cent its share price this morning.

In an update today, the FTSE 250-list firm said that underlying profits for 2016 will be £225m – some £20m lower than it forecast last month. The group also said that it cannot yet give guidance on how it will perform over 2017.

The firm, which provides communications equipment, control systems and services to the defence industry, used to be a favourite with UK fund managers but is now in the top 10 holdings of just two funds – Close FTSE techMARK, which had 3.92 per cent of its portfolio in the stock at the end of 2016, and VT ODD Real Income, which had a 2.5 per cent stake.

Performance of Cobham on morning of 16 Feb 17


Source: FE­, as at 10:45

Cobham will take millions of pounds in goodwill charges. The firm announced a £574m impairment on problems across several of its units, including £196m against its wireless business unit and its £192m against the semiconductor solutions business unit.

It will also take a £150m against a project to develop the KC-46 mid-air refuelling tanker for Boeing, which has been hit by spiralling costs.

As the above chart shows, Cobham shares fell as much as 22 per cent at the start of trading today and were 17.6 per cent down at the time of writing.

David Lockwood, chief executive of Cobham, said: “2016 was an incredibly turbulent and disappointing year for Cobham. Execution failure in many businesses led us to miss expectations badly and provides a poor entry point into 2017.

 “The medium term provides significant opportunity with encouraging market dynamics and strong product and programme offerings. The route to realising this potential is strong operational performance and financial control, which will be the relentless focus through 2017. This has commenced and the potential to improve is clear."

However, analysts were less sanguine than the chief executive on the outlook for the company.

Neil Wilson, senior market analyst at ETX Capital, pointed out that the company went through a 20 per cent drop as recently as January – when it last warned on profits.

“We’re getting used to dire news from the group these days and today it was a £150m charge on the KC-46 Tanker programme with Boeing,” he said.

Performance of Cobham vs FTSE 250 over 3yrs


Source: FE Analytics

“That’s now five profits warnings in 15 months. Investors are ditching the stock as it looks like the problems at Cobham go further than anyone realised when all this started,” he said.

“There is every reason to think that management’s review of the business may throw up further concerns and more write-downs. Chief executive David Lockwood has a bit more tidying up to do after the Bob Murphy years of acquisitions and diversification.”

Wilson argues that many of the firm’s problems stem from the “bad investment” that was its acquisition of Aeroflex, the wireless business that Cobham bought in 2014 for £900m.

“This was too high a price and Cobham has struggled ever since. A £500m rights issue followed and some of that was used to pay the dividend. It’s all a bit of a mess but the plunge in the stock might just about be the worst of it,” he added.

“Lockwood noted that today’s warning is a ‘poor entry point into 2017’, but the sharp readjustment in the valuation today may be a useful entry point for investors. Although that is what was being said in January after profits warning number four.”

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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