Deutsche Bank upgrades Cobham but caution remains

Deutsche Bank upgraded Cobham to 'hold' from 'sell' after the aerospace and defence group proposed raising £500m from a rights issue in the second quarter.

However, while the concern about the company's balance sheet leverage has been eradicated and the shares have falled 40% fall in the year to date, Deutsche still does not believe the share price offers a buying opportunity as residual risks still cast a shadow over 2016 guidance.

DB has effected a 19% cut to its earnings per share forecasts due to dilution from the right issue and a 21% cut to its target price to 185p as the first-quarter profit warning leaves a long way to go.

The German bank said it believes buying the shares would be premature due in part to residual forecast risks remaining for 2016 due to "execution challenges" which in its sees overhanging KC46 air tanker equipment certification.

"This could lead to a slippage of some of the £80-100m revenues we estimate should have been traded on this contract this year and/or could see some additional costs incurred for Cobham to resolve," Deutsche said.

Analysts still see some risk to 2016 numbers based on the material improvement needed in later quarters to reach full year guidance following the £26m underlying profit deterioration witnessed in the first quarter compared to the same period last year.

Second, although investors anticipation of some M&A could support the shares after the major share price drop, DB's analysts see potential M&A as "challenging" given the breadth of the Cobham portfolio and a buyer making the maths work.