With SEA back in profit and MASS humming along defence technology supplier and consultancy Cohort seems to be managing its way profitably through Ministry of Defence cut-backs.

Highlights

• Adjusted operating profit up 44%
• Return on tangible assets: 10%
• Adjusted net profit of ''6m compared to net cash flow of ''8.5m (''8.5m after net capital expenditure)
• Net cash ''6.5m, including approximate capitalised lease obligations of ''7.5m  
• Per-share dividend up 21%
• Shares in issue unchanged

The Human Screen comments:

Cohort is three relatively small technology businesses providing products and services mainly for the defence sector, but also space, transport, education and industry. Cambridgeshire based MASS designs, implements and supports secure communications systems, networks and data management. SCS is a consultancy that helps the Ministry of Defence and other agencies with project management. SEA is expert in naval and tactical communications, simulation based training solutions and space hardware. MASS and SEA joined SCS after it listed in 2006 with the intention of combining businesses in the fragmented defence technical services market.

Abacus EW (Electronic Warfare) joined MASS in 2012, and Cohort continues to expect to add value by acquisition, although it allows the three businesses considerable autonomy – a competitive advantage the company believes, because the nature of warfare is changing rapidly. While in some respects this has leads greater standardisation and larger defence systems, in other respects it favours smaller contractors that can adapt quickly.

SCS is suffering from defence budget cuts, and SEA has too, but CEO Andy Thomis thinks the UK defence market may have stabilised and Cohort is active in areas likely to remain funded by the MoD.

Although SEA wasn’t profitable in 2011 and the company is directly dependent on the Ministry of Defence for 41% of its revenue (and indirectly too), Cohort has remained comfortably profitable throughout the recessions. The Human Screen believes it is a potential stalwart.

If it is, an unlevered post-tax earnings yield of about 12% looks cheap.

HS++ (currently being considered for inclusion in the Thrifty 30)

• The Human Screen
• Cohort annual reports
• Cohort worksheets