Aerospace and defence company Cobham (COB) shares jump by 6.7% to 143p after revealing that a £12m operating loss in the first six months of 2016 has been turned into a £34.7m operating profit for the first half of 2017.

The company’s new chief executive David Lockwood says: ‘We have been working hard to build the foundations for our future success but we are in the early stages of implementing a challenging turnaround in the group’s performance.’

Despite the company’s order intake being down over 20% compared to the first half last year at £915.8m, its revenues are broadly flat when the 9% uptick is taken out due to a favourable currency translation.

This pleases UBS analyst Cristian Nedelcu who had predicted a 5% decline in revenue. He says the result indicates stabilisation in the business.

Sandy Morris, an analyst at investment bank Jefferies, sums up Cobham’s first half results as being ‘not good, but enough’.

He adds that ‘words and proposed actions will count for more than the numbers, certainly if Cobham’s valuation is the benchmark’.

The shares trade on 26 times forecast earnings for 2017 as a whole. According to Reuters, its peers trade on a forward P/E of 16.4 times. Cobham is also not paying a dividend until it is ‘prudent to do so’.

Morris says Cobham may do well but it will need strong leadership or, to use his phrase, ‘a strong hand on the tiller’.

Lockwood has already warned the turnaround will be ‘challenging’. Despite free cash flow being strong in the first half, Cobham has signalled this is likely to reverse in the second half due to onerous contracts and other legacy items.

New blood

The new management team at Cobham seems to be on the right track and this is felt by David Perry, analyst at JP Morgan Cazenove.

He says: ‘We believe new management has begun to de-risk the business.’ His price target has been raised to 145p.

Jefferies’ Morris is relieved ‘the new management team has not decided Cobham’s woes can be resolved by changing the names and structures of each division’.

Lockwood has implemented a programme with three priorities of better customer focus, leadership and simplification as well as control and execution.

The management also wants Cobham to focus on its core aerospace and defence markets. The company has announced a strategic review of its non-core communications products which make up for around 10% of the company’s sales.

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Issue Date: 03 Aug 2017