Ongoing conflicts in Ukraine and the Middle East and calls from incoming US president Donald Trump for NATO members to increase defence spending as a percentage of national income will continue to provide a tailwind for the defence sector.

AIM-quoted Cohort (CHRT:AIM) is well positioned to benefit from an increase in defence spending and at the first-half results on 11 December, the group disclosed a record order book of £541 million, representing around 99% of consensus revenue expectations for the year to the end of April 2025.

Analysts continue to underestimate momentum in the business as reflected in persistent upward revisions to consensus earnings per share estimates for 2025 and 2026 which means today’s estimates are 20% and 40% higher than a year ago. This trend should continue to support the shares.

The company is differentiated from other defence contractors in that Cohort acts as the parent company overseeing six innovative and agile businesses which provide a range of products and services for UK, German, Portuguese and international customers in defence and related markets.

This decentralised approach allows the individual businesses to prosper and respond more flexibly to customers’ needs and grow and deepen customer relationships.

The proof of the operating model can be demonstrated by the financial success delivered by the group. The dividend has increased by more than 10% a year over the last three years and has increased every year since IPO (initial public offering) in 2006.

Revenue has increased at a compound annual growth rate of 11% a year over the last five years, while operating profit has grown at a CAGR of almost 30% a year reflecting rising margins. Free cash flow has grown at a CAGR (compound annual growth rate) of 20% a year.

WHAT IS THE STRATEGY?

Cohort’s strategy is to grow organically by exploiting its competitive advantages and make selective bolt-on acquisitions where the company sees an opportunity to increase profitability and gain access to new markets.

The company is also on the lookout for standalone businesses which offer growth potential and sustainable competitive advantages that are ready to join a larger group. 

A good example of the type of deal Cohort targets is the recent purchase (21 November) of leading Australian-based developer and producer of high-end SATCOM terminals for global naval and defence customers, EM Solutions, for around £75 million.

The acquisition enhances the company’s existing defence and communications offering while gaining exposure to the naval surface vessel SATCOM (Satellite Communications) market which has strong structural growth drivers.

EM Solutions will also beef up the group order book to more than £650 million and is expected to be ‘materially’ earnings accretive in the first full year of ownership, in line with the company’s      acquisition criteria.

Cohort financed the deal partly through an institutional and retail share placing, raising £40 million at a 4% discount to the prevailing share price. The balance sheet post purchase remains robust with net debt to earnings before interest, tax, depreciation, and amortisation of less than one.

TECHNOLOGY DRIVEN DEMAND

A key strength underpinning future success is the amount of money the group spends on research and development which increased 26% in the last financial year to more than £14.5 million, equating to around 7% of revenue.

The company’s six businesses are grouped under two divisions, the largest of which is sensors and effectors representing nearly 60% of group revenue and communications and intelligence representing the rest.

The UK remains the groups most important domestic market while internationally, rising tensions around the South China Sea are creating demand for naval systems demand in Australasia and Asia.

In summary, Cohort is a strong business with a proven track record of growth and of delivering shareholder value. 

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