Aerospace and defence company Cobham (COB) financial and share price recovery last year might now appear to have been short lived. The company’s share price is down 9.9% to 118.55p after a plethora of bad news on Thursday 26 July.

In what prima facie appears to be a profit warning, the company has said that US aerospace giant Boeing is withholding payment on two of its major contracts.

Boeing’s ‘as yet unquantified damage assertions’ relate to the KC-46 tanker plane and the Wing Aerial Refuelling Pods (WARP) programmes.

The KC-46 contract has been fraught with problems for some time. In March this year, three ‘category I’ issues were identified, basically meaning major problems.

Costs for these setbacks had been falling squarely on Boeing, Sandy Morris, analyst at investment bank Jefferies, says not paying Cobham is ’unusual and tough’.

Boeing entering into the project on a fixed price deal may suggest that the US company may just be trying to take some of the sting out of the costs overruns.


Aside from Boeing withholding payment, which Cobham is disputing, the Centerline Drogue System, a part of the KC-46 programme, is taking longer and been ‘more challenging than expected’.

Further woes relate to the WARP contract with risks relating to schedule and cost. The company says that completion could take ‘significantly longer than originally planned’. Cobham estimates that the damage will amount to a non-underlying charge of £40m in its first half to 30 June results.


Despite the company saying that delays to the WARP contract will cost £40m, it is making no changes to its underlying profit guidance for the year.

Jefferies Morris is optimistic, saying 'the additional charge and delayed payments from Boeing pose no threat to Cobham's financial position’ although this is said with the assumption that Boeing are just ‘delaying payments’.

While refusals of payment and additional costs may be one-offs if the Boeing issue isn’t resolved there’s the possibility Cobham may not be awarded future work from the US powerhouse which could have dire consequences going forward.

The silver lining is that the WARPs are being delivered to the US Air Force not Boeing, expected in October this year. Morris says this may limit Cobham’s further exposure to this problematic contract.

Using data from Reuters, Cobham is trading on a forward price-to-earning ratio of 22.6-times. This is at a slight premium to its sector. While this valuation may be justified with big ticket clients like Boeing, losing them may make the company look at a bit rich.

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Issue Date: 26 Jul 2018