Berenberg ups Cobham target but says premium valuation "unwarranted"

Alexander Bueso WebFG News | 20 Oct, 2017 17:10 - Updated: 17:10 | | |

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Cobham

128.40

16:45 22/11/17
0.94%
1.20
  • 3,480.76
  • 0.33%11.45
  • Max: 3,492.14
  • Min: 3,464.21
  • Volume: 0
  • MM 200 : n/a
16:45 22/11/17
  • 20,013.86
  • 0.35%69.88
  • Max: 20,059.37
  • Min: 19,943.89
  • Volume: 0
  • MM 200 : n/a
16:45 22/11/17
  • 4,842.92
  • 0.26%12.74
  • Max: 4,885.77
  • Min: 4,822.99
  • Volume: 0
  • MM 200 : n/a
16:45 22/11/17
  • 4,127.98
  • 0.15%6.01
  • Max: 4,147.16
  • Min: 4,121.95
  • Volume: 0
  • MM 200 : n/a
16:45 22/11/17
  • 4,074.48
  • 0.10%4.03
  • Max: 4,094.81
  • Min: 4,070.45
  • Volume: 0
  • MM 200 : n/a
16:30 22/11/17
  • 4,608.74
  • 0.63%28.88
  • Max: 4,621.95
  • Min: 4,578.02
  • Volume: 0
  • MM 200 : n/a
16:45 22/11/17

Despite Cobham share's outperformance over the past six months, Berenberg cautioned clients about the near-term strength of various of the firm's end-markets, alongside operational challenges that would require time to resolve and, for a time, scupper hopes that the dividend would be reinstated.

Stock in the electronic solutions and aviation services provider had run 7% ahead of the Footsie during that time period, but the broker said its short-cycle cyclicality remained "challenging".

Berenberg said it had yet to see a recovery in multiple end-markets, including for marine Satcom, wireless and the lobger-cycle Australian fly-in, fly-out busienss, all of which led the broker to expect a "muted" third quarter trading update come November.

Then there were the challenges to the KC-46 tanker programme, where Berenberg spied the possibility of further programme slippage.

Furthermore, the booking of £200m of contract loss provisions over the coming three years would negatively impact on Cobham's free-cash-flow, Berenberg said.

As a result, while the broker did expect a "modest" dividend to be reinstated, it did not see that happening until fiscal year 2019.

Trading on a fiscal year 2019 price-to-earnings multiple of 19.8 and at 14.4 times its EV/EBIT, Berenberg estimated the shares were at a 20% premium to its UK aerospace and defence peers.

"This appears unwarranted given the operational and end-market challenges that face the business over the next 12 months. However, we believe market optimism over the recovery story will support current levels."

Berenberg reiterated a 'hold' recommendation on the shares and 130p target, with the latter being revised up from 120p beforehand.

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