Barclays downgrades Cobham to 'equalweight'

Barclays downgraded Cobham to ‘equalweight’ from ‘overweight’ saying it expects several unquantifiable bumps along the way in the next six months and sees cleaner yet equally compelling value to be had elsewhere in its coverage.

The bank said that while the logic behind rebalancing away from defence was sound at the time, commercial markets have softened significantly since then, while pure-play defence peers have re-rated to all-time highs.

It said the rights issue further dented sentiment and in turn valuation multiples, meaning the stock still looks cheap, but the the impending management change cannot be ignored in the near term.

“We remain compelled by Cobham’s valuation, this is still the highest margin defence company on the planet trading at just 12.6x FY16E P/E, with a 4.8% dividend yield and a free cash flow of yield of around 7%, yet it trades at a P/E discount of around 30% to comparable US defence peers. Clearly the risk/reward looks to be skewed to the upside on a 12 month view,” the bank said.

Barclays said that while management remains cautiously optimistic in the company just about attaining the second half plan, this is unlikely to be sufficient to see that valuation gap close materially more than it has already as around 30% of revenues are exposed to non-aerospace and defence ‘commercial’ end markets, offering a lesser degree of safety than the pure-play defence peers.

“With the balance sheet now addressed the underlying story at Cobham should be a cleaner one. Should management be able to deliver their revised guide, confidence will slowly be restored in this 16% margin, highly cash generative technology business with high barriers to entry.”

Barclays maintained its 183p price target on Cobham.

At 0920 BST, shares were down 1.1% to 160.03p.