Due to cuts in government spending investor sentiment in the defence sector is weak, but Cohort has profited persistently and looks like a worthy addition to the Thrifty 30 portfolio.

Creator / Landlord / Distributor / Broker

It’s very hard to categorise Cohort. As a consultancy it’s a landlord of human capital and a creator of technology solutions. As a supplier it’s a distributor of IT. Its three business operate mostly in the defence market, but also transport, education and industry, developing, supplying, testing, training and supporting the operation of secure communications networks, databases, simulation based training and space hardware.

Bargain / Turnaround / Cyclical / Stalwart / Growth

Cohort depends directly on the Ministry of defence for 41% of revenue, probably significantly more indirectly, and other government-funded customers are likely be suffering as governments shrink defence spending. One of its three businesses, SEA, made a loss in 2011 and SCS, its consulting arm is also recovering after accounting errors masked rising costs and falling profitability in 2009 but, while these events reduced profitability, the group has remained stubbornly profitable since it listed in 2006.

Expectations

This year’s results indicate SEA and SCS are recovering and Chief executive Andy Thomis thinks UK defence spending may have stabilised. Many of Cohorts projects that have emerged from the Strategic Defence and Security Review and are therefore well funded. Meanwhile it’s continuing to diversify into European defence markets and industry although it remains dependent on the UK for 86% of sales and defence for 81%. Since Cohort has strong finances, acquisitions should be expected.

Threats

competitive position – weak / neutral / strong
Defence technology is a competitive and fragmented market. Cohort seeks to differentiate itself from larger competitors working on bigger projects by being more agile, running its three business autonomously. This motivates employees and gives it an advantage on smaller projects where speed and innovation are factors, although it may also have given SCS the freedom to screw up.

finances – weak / neutral / strong
Cohort ended the financial year in 2012 with ''6.5m in cash, net of all debt and approximate capitalised operating lease obligations, giving it the means to invest in its businesses and acquire new ones.

management – weak / neutral / strong
Co-chairmen Nick Prest and Stanley Carter have steered the company into this strong position since its flotation, Carter as chief executive until 2009. He founded SCS in 1992 and owns 26% of Cohort, Prest owns 5% and Thomis, the current chief executive who was recruited to help create Cohort, owns a more modest holding. All of them have impressive looking CVs.

As demonstrated by SCS, the relative autonomy of the three subsidiaries may be a weakness as well as a strength, but Carter returned as temporary managing director to restructure SCS and the company has improved the oversight of its finances.

valuation – cheap / neutral / expensive
Using after-tax operating earnings over the last seven years, Cohort yields about 9%, which is a reasonable return but it includes Cohort’s year of flotation and the year after, when it was a much smaller company. Factor out its drastically smaller size in its earlier years, and the company looks cheap, yielding about 12%.

• About the Thrifty 30
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• Cohort annual reports
• Cohort worksheet
• Previous blogs about Cohort