Cobham rallies on BofA Merrill Lynch upgrade to 'buy'

Aerospace and defence group Cobham got a boost on Monday as Bank of America Merrill Lynch upgraded the stock to ‘ buy’ from ‘neutral’ noting the balance sheet was reset and the valuation is attractive for a defence asset.

BofA ML pointed out that Cobham has completed a rights issue of around £500m, bringing the leverage to a much healthier 1.9x net debt EBITDA by year end FY16, putting the bank’s previous concerns about leverage to rest.

It argued that commercial growth remains a concern but said Cobham has a well-positioned defence portfolio, and it expects modest organic improvements in both the US and non US defence exposures.

“The group remains one of the most cash generative in the defence sector, and we see upside risk to free cash flow in FY17 if the group can execute on working capital.”

ML noted that post the rights issue, Cobham currently trades at a 17% discount to peers.

“We believe this is an attractive risk reward, for a business with 61% of sales exposed to a troughing defence cycle,” said the bank, adding that it more than compensates for commercial risks.

BofA ML has a 165p price target on the stock.

At 0920 BST, Cobham shares were up 5.4% to 151.32p.