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.
But now it has revealed that first quarter profits plunged by 70% to £15m, partly due to delays in orders from its wireless business which has led to a £9m one off charge. It has also suffered falling demand for its aviation business, especially charter flights for Australian natural resources customers in the wake of the slide in commodity prices.
Cobham said its borrowings to fund the Aeroflex deal had not fallen as quickly as expected, partly due to the strengthening of the US dollar against the pound. So without raising new funds it said it would come close to breaching covenant terms agreed with its lenders. Chief executive Bob Murphy said:
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.
It plans to cut costs by £30m and warned that 2016 profits were likely to be £15m lower than the previously expected £315m.
Cobham’s shares are currently down 19% at 173.4p having fallen as low as 169.4p. Analysts at RBC said:
Besides the headline 5% cut and equity raise, this morning’s release raises concerns regarding execution, which may take a while to rebuild.
Sandy Morris at Jefferies said:
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.
