A consolidator within the large and fragmented defence technical services market, Cohort, which joined AIM in March 2006, is a cash-generative, dividend-paying business whose backers include Invesco, AXA Framlington and Unicorn. Acquisitions have brought critical mass, contract momentum is building and with further astute takeovers to follow, Cohort is sure to win new fans.

Cohort, which came to market via a £9.5 million placing priced at 123p, provides an array of technical services and advice. Recent interim results to October were strong, with pre-tax profits increasing by more than 40 per cent to £1.5 million, on revenues up 55 per cent to £20.9 million. From earnings of 4.12p, up 38 per cent, the dividend rose by 12.5 per cent to 0.45p.

Oxfordshire-based Systems Consultants Services (SCS), the only subsidiary at float, enjoyed near 30 per cent sales growth to £12.7 million. SCS is a fast-growing technical services provider whose key client is the MoD. Although sales growth was impressive, buoyed by parts of SCS feeding into and supporting MoD operations, profits were flat, reflecting some significant investment and weaker demand in parts of the business dependent on MoD capital budgets.

Contributing £8.2 million of turnover and £900,000 of operating profit was maiden AIM acquisition MASS, which was acquired for up to £13 million in the summer of 2006 in a deal part-funded by an £8.8 million placing at 135p. Finance director Simon Walther comments, ‘It is a niche business and the oldest of our companies. MASS is an independent systems house focused on defence – mainly aerospace.’

Services include systems engineering, software and electronic engineering and, as with SCS, MASS’s main client is the MoD, alongside BAE Systems and others including VT Shipbuilding. Activities undertaken by the business range from technical and IT services provision at secure MoD and government sites to tactics and countermeasures development for the Defence Electronic Warfare Centre. Needless to say, MASS has a terrific position in a market with extremely high entry barriers.

In October, with the half-year coming to an end, Cohort announced its second AIM acquisition, buying SEA in a deal capped at £25.4 million. A specialist developer of electronic surveillance systems for the defence, space and offshore sectors, SEA has just clinched more than £5.5 million worth of contracts for two transport-sector clients, Transport for London and Network Rail. Walther sees SEA, which boosted the group order book considerably, as bringing strengths in naval defence to complement the aerospace focus of MASS. SEA and MASS have given the group critical mass, leaving it better placed to compete for bigger contracts, both domestically and in export markets.

Management is running the rule over additional acquisitions. ‘There are two types of businesses we are looking at,’ explains Walther, ‘companies with sales north of £15 million to £20 million with good management teams that will enhance our earnings, and smaller companies with sales of less than £5 million where we are looking to acquire capability.’

Before any further deals, house broker Investec suggests a pre-tax profits rise to £5.6 million (2007: £3.2 million) and an earnings increase from 8.9p to 11.9p for the current year to April. For 2009, a £7.4 million profit and 13.9p of earnings have been pencilled in, placing the shares on reasonable forward multiples of 13.9 and 11.9 for this year and next.

Profitable and demonstrating progressive dividend growth, Cohort is a reasonably defensive investment, based on the specialist expertise of its three subsidiaries, offering organic and acquisitive growth in markets that management knows well. Its solid forward order book – quoted at £56.1 million at the half-year – adds reassurance.

Cohort	AIM	£59.71m	147.50p	0.00p
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