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Cobham loses 19% after profit warning and £500m emergency cash call

Discussion in 'Market News' started by Lily, May 4, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Full year profits will be lower than expected amid balance sheet strain

    Cobham has crashed by nearly a fifth after the engineering group issued a profit warning and launched an emergency £500m cash call.

    The company had tried to expand from its key military customers, where it supplied the likes of mid-air refuelling equipment, and boost its presence in the commercial arena with the $1.46bn purchase of US communications specialist Aeroflex in 2014.

    In order to put the company on a sound footing and to secure funding for our major development programmes in the longer term, we have decided to refinance the business through a rights issue to raise approximately £500m.

    Besides the headline 5% cut and equity raise, this morning’s release raises concerns regarding execution, which may take a while to rebuild.

    We could not envisage a scenario where Cobham risked breaching the net debt/EBITDA covenant limit of 3.5 times, but the operational issues at Wireless have derailed our arithmetic. The scale of the problem is one thing, the scale of the solution another. There is much to digest, but we firmly counsel against over-reacting.

    Inevitably, we believe there is scope for consternation until the dust settles. After that, the key thing is that we estimate 80%-85% of the Group – all bar Wireless Test and the Australian Fly-In, Fly-Out operations - is staying the course. Order intake in 2015 and the first quarter of 2016 appears to have been satisfactory in the Defence/Security businesses and latterly even in Cobham Wireless. We understand proof that Wireless has been fixed may be demanded. On 30 March, 2016, Inmarsat formally launched Fleet Xpress, a development that may now generate demand for Cobham SATCOM. Having misjudged things, we are bound to advocate some caution today, but we believe fears of a dividend cut already weighed significantly on Cobham and so counsel against over-reacting.

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