Deutsche downgrades Cobham on valuation, Aeroflex deal

Deutsche Bank downgraded Cobham to ‘sell’ from ‘hold’, noting that after the recent run in the stock, the 265p price target is now 12% below the current share price.

The bank said although US defence budgets have reached inflexion point, post recent M&A Cobham is now less geared into US defence end markets.

Deutsche expects full year 2015 net debt to EBITDA of 2..6x, which though well below covenant 3.5x, leaves Cobham unable to execute M&A for at least two to three years.

Near-term, DB expects no earnings per share growth in 2016, below the growth of the EU defence peers which are all much cheaper on EV/EBIT valuation – a more appropriate metric than price-to-earnings ratio due to balance sheet leverage differences.

It added that exposure to some difficult commercial end markets could create residual forecast risk.

“Last year's Aeroflex deal continues to look unconvincing in our view, with returns impacted by the recent balance sheet restatement made on the deal,” it said.

In addition, the pace of de-leveraging now looks to be lower than DB had originally expected.

At 0925 GMT, shares were down 2.2% at 292p.