COHORT PLC (CHRT) — Investment Research Note

Executive summary

Cohort is a UK-listed (AIM) holding company for seven specialist defence-technology businesses across the UK, Germany, Portugal and Australia, active in naval sonar, satellite comms, electronic warfare, surveillance/fire-control, communications and specialist services. Since FY22 revenue has more than doubled (£137.8m → £306.4m) and adjusted operating profit has grown from £15.5m to £36.3m as European rearmament and Indo-Pacific tensions have driven order intake, culminating in a record £618.8m order book stretching to 2037 2026-07-15 final results. The single most important valuation input today is management's roadmap to move net margin from 11.8% toward "mid-teens by end of the decade" while delivering double-digit EPS growth in each of the next three years — the market is already pricing in a good portion of this outcome.

Fair value estimate

• Methodology: Forward P/E on FY27E adjusted EPS, cross-checked against sector multiples. Also sanity-checked against order-book coverage of 88% for FY27 revenue 2026-07-15 final results.
• Assumptions: FY26 adj. EPS 61.9p; management guides double-digit EPS growth in FY27, FY28, FY29. Central FY27E ~68p, high case ~72p. Applied 18–22× forward P/E (in line with mid-tier European defence peers currently benefiting from a re-rating).
• Fair value range: 1,225p – 1,585p per share (18× × 68p to 22× × 72p), midpoint ~1,400p. Implied market cap range: £560m – £725m, midpoint ~£640m.
• vs. current mcap £657.4m: Central case implies ~2% downside to ~10% upside. Absolute upside/(downside): approximately –2.4% to the midpoint / +10.5% to the high end. Broadly fair value.

Sector context

• ICB classification: Industrials / Industrial Goods & Services — confirmed. Sub-industry: Aerospace & Defence.
• Peer positioning: Above-typical sector quality on order visibility and dividend consistency (10% annual growth since 2006 IPO); balance sheet is stronger than most peers (net cash, £175m facility). Growth momentum is above sector average; margins remain below larger primes.
• Listed peers: BAE Systems, Chemring, QinetiQ; on the continent Rheinmetall, Kongsberg; among mid/small-caps Avon Protection.

Investment thesis

• Structural defence tailwind + strong visibility: NATO 3.5%-of-GDP target by 2035 and record £618.8m order book, of which £264m is already deliverable in FY27 (88% cover) with revenue extending to 2037, gives multi-year earnings visibility rare on AIM 2026-07-15 final results.
• Margin expansion runway: Net margin improved from 10.2% to 11.8% in FY26, with management targeting low-teens in FY27 progressing to mid-teens by end of decade, driven by EM Solutions integration, Chess turnaround, and completion of Italian sonar production ramp 2026-07-15 final results; 2025-07-16 final results.
• Diversifying revenue base with high-quality balance sheet: UK MOD reliance has dropped from 50% to 40% of revenue in one year; export defence up 27%; new £175m banking facility (tripled) alongside net cash of £2.2m provides fire-power for further M&A 2026-07-15 final results.

Key risks

• Working-capital volatility and lumpy H1/H2 phasing: H1 2025/26 saw £32.5m net debt swing before an H2 £43.7m inflow; larger naval programmes make cash generation harder to forecast quarter-to-quarter 2025-12-10 half-year results.
• Execution risk in Sensors & Effectors: Chess has repeatedly underperformed, requiring management changes in H2 FY26 and a planned £15m new facility; sub-target net margin of 7% in the division vs. mid-teens ambition 2026-07-15 final results.
• Concentration in UK/Portuguese government customers and cyclical defence budgets: 40% UK MOD, plus meaningful Portuguese Navy/Army exposure; a slowdown in defence spending — or Portuguese order slippage as seen at EID in FY24 — could compress growth 2024-07-17 final results; 2026-07-15 final results.

Operating leverage

Cohort has moderate operating leverage. Group gross margin is ~34% (FY26) with a largely fixed engineering/R&D base (R&D £31.1m in FY26 vs. £20.1m FY25, ~10% of revenue) and increasingly capital-intensive facilities (ELAC's £21m Kiel build; Chess's proposed £15m Horsham build). Revenue crossing fixed cost thresholds has already delivered visible operating gearing: revenue +13% in FY26 drove adjusted operating profit +32%; C&I division revenue +25% drove operating profit +54% 2026-07-15 final results. Management's guidance implies incremental contribution margins in the high teens to low twenties as production capacity expands into existing overhead. However, this is not a "software-like" operating-leverage story — a good chunk of costs (materials, direct labour on production contracts) scales with revenue. A 10–20% upside surprise on revenue would plausibly add 30–60% to operating profit, not multiples. Fixed-cost step-ups from the new facilities may temporarily blunt near-term operating leverage before ramping.

Value-trap signals

None identified. Order book is at a record high, EPS is compounding at double digits, dividend has grown 10% every year since 2006, balance sheet is net cash, disclosure is high-quality, and the demand backdrop is structurally supportive.

Earnings vs. expectations

Cohort has consistently beaten or met expectations across the period. FY26 delivered £306.4m revenue and £36.3m adj. OP vs. consensus of £293.9m/£34.7m — a modest beat 2026-05-27 trading update. FY25 delivered £270m/£27.5m vs. consensus £245m/£27.6m — clear revenue beat, in line on profit 2025-05-29 trading update. FY22 had signalled a shortfall in the December 2021 half-year statement (Chess and EID weakness) which was subsequently delivered against revised expectations. Pattern: consistent trading updates, generally meeting or beating with occasional H1 disappointments driven by Chess and EID that are usually recovered in H2.

Conviction

Conviction: 4 (high). Anchoring factors: (i) exceptionally clean disclosure with 5-year cash cover/dividend history tables; (ii) £619m contracted order book with revenue extending to 2037 provides unusually strong forward visibility; (iii) management's mid-teens margin target is credible given the C&I division already reports ~20% net margins. Limiting factors: (i) forward defence-multiple environment is unusually elevated globally, making the "right multiple" question harder than usual; (ii) Chess turnaround remains unproven and could delay margin ramp.