UBS sees turnaround at Cobham, upgrades to 'Buy'

UBS upgraded its recommendation on shares of Cobham from 'Neutral' to 'Buy', hailing management's decision to address its excessively high gearing through a rights issue and 'self-help' initiatives as the "beginning of the turn-around".

The company's efforts were expected to lower net debt as a percentage of operating profits (EBITDA) down to a "more comfortable" level of 1.8 times.

Furthermore, analyst Cristian Nedelcu believed markets were underestimating Cobham's ability to improve its margins.

He estimated markets were pricing-in about 100 basis points of margin increases over the medium-term, whereas Nedelcu saw scope for 400 basis points worth of improvement which would take them to 15.5%.

As a result, starting with 2019 UBS revised its estimates for earnings before interest and taxes up by between 3.5% and 5.5% a year and for free cash flow by 18% per annum.

"We see ample room for FCF improvement going forward driven by: improvement in profitability, the non-repeat of cash outflows related to past provisions, lower restructuring cash charges as well as cash release from working capital and a normalisation of capex investments," he said.

Nedelcu raised his target price from 120.0p to 155.0p.