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Morgan Stanley upgrades 'stabilised' Cobham to 'overweight'
Following a challenging period for technology and services firm Cobham, analysts at Morgan Stanley now see an improved risk-reward case on the horizon.
Morgan Stanley thinks Cobham's current management team have successfully "stabilised" the group's performance, with necessary costs "sunk" and careful measures taken to aid operational delivery.
Together with the start of multi-year up-cycles in its core defence and aerospace markets, the broker believed that consensus was now underpinned.
Some of the company's other niche exposures also appeared to be near a bottom, Morgan Stanley said.
Thus, MS felt believed that Cobham's earnings potential out to 2020 had not been factored into its current share price.
The broker noted that structural headwinds in the group's portfolio had largely played out by 2015 when Cobham generated 16% margins, which included underperforming businesses that have since been divested.
"We view 16% as closer to normalised margins and see scope for them to grind higher and support EBITA growth. On 10x 2020e EBITA, we think little of this is priced in," MS said.
"We estimate that Cobham could return ~15-20% of the current market cap to shareholders and keep leverage at ~1x ND/EBITDA," the analysts added.
Based on their estimates, the shares were trading on end-2019 and 2020 dividend yields of 1.9% and 2.2%.
MS acknowledged residual risks around Cobham's KC-46 aerial refuelling tanker programme but stated that current provisions for cost overruns were conservative and that it saw "several mitigating factors" that could avert any potential delayed performance penalties.
All in all, MS upgraded Cobham from 'equal-weight' to 'overweight' and upped its target price on the "currently under-earning" firm to 150p from its previous 115p figure.