Cobham climbs on back of plans for another £500m rights issue

Cobham is planning its second £500m rights issue in less than a year, after it sank to a huge £848m loss for 2016, though its shares rose as the defence specialist avoided a sixth profit warning in 15 months.

Having conducted a sizeable kitchen-sinking exercise only two weeks ago as part of its fifth profit warning in just over a year, the company said its outlook was otherwise unchanged from then, though management continued to fee delivery of a similar performance to that of 2016 in 2017 "may be challenging".

With new chief executive David Lockwood appointed in December and chairman Michael Wareing in November, board feels its ability to forecast performance in 2017 "not as strong as it should be", which leads it to provide no guidance for the year apart from that it offers "a wide range of potential outcomes".

Despite a rights issue in June last year that raised a net £490.6m, net debt was still £1.03bn at year end, down by £178.6m on the prior year.

Under previous leadership the company used a quarter of the previous £500m cash call to pay last year's interim dividend.

Cobham's net debt-to-EBITDA ratio at the year end was 3.0x, slightly higher than at 31 December 2015, but still within the upper threshold of its banking covenants.

Lockwood and Wareing warned in February that the balance sheet is "not strong enough" to support the operations of the group, given the important role it plays in many customer programmes, hence the need for the new rights issue, which will be completed in the second quarter of 2017 and used to pay down borrowings on the revolving credit facilities.

A "deeply disappointed" Wareing said that even though the board has already undergone significant change over recent months, "it is my intention to effect a rolling programme of material board changes over the next two years" in order to add new and experienced non-executive directors.

For 2016, with orders roughly flat at £2.08bn, underlying revenues fell 6% to £1.94bn compared to the prior year, with profit before tax down 38% to £175.2m and earnings per share by 45% to 9p.

At the statutory level, reflecting impairments of £573.8m, the FTSE 250 company swung from the previous small operating profit of £12m to a £779m loss that grew to £848m at the pre-tax line, with a basic loss per share of 52.8p versus 2.8p before.

The final dividend was withheld, as pre-warned, with no dividend to be recommended in respect of 2017.

Said Lockwood: "Given the reality of Cobham's current financial performance and our high leverage coming into the year, we have announced actions today to strengthen the balance sheet. This is needed to reassure our customers, to give us the flexibility to drive operational improvements and to provide us with a sustainable platform for the future.

"Cobham has a portfolio of businesses with leading positions in attractive markets, differentiated technologies and know-how, and an enviable customer list. This gives us confidence that Cobham can be reinvigorated over time, as our actions release its potential and demonstrate the value in our businesses."

Shares in Cobham were up 6.3% to 129.9p by 1100 GMT, still short of the 135p before the last profit warning and a long way from 2015's highs around 340p.

Along with not reporting another profits warning, analyst Neil Wilson at ETX Capital said investors are reacting positively as CEO Lockwood indicated he was prepared to tackle legacy issues head-on.

"The rights issue is a must-do as net debt, at more than £1bn is 3x earnings and a little close to breaching covenants (x3.5) for comfort – it would only take another write down or two to go through this level. Balance sheet strength is also essential to maintain future earnings growth and it admits that it is not strong enough at present."

But Wilson said the outlook remains dim and said Lockwood's review of the business may throw up further concerns and more write-downs, as he tidies up after the Bob Murphy years of acquisitions and diversification, principally overpaying for the £990 acquisition of wireless business Aeroflex in 2014.

"Today’s rights issue may also be seen as a sign that Cobham expects to find another skeleton or two. But the rally might just be the start of better things to come. A burgeoning US defence budget has to be a positive and the rights issue, coupled with much a much tighter grip on cost controls, will help."