I find trading in my personal pension quite stressful. Intellectually, it’s a taxing process to evaluate everything you know about a share against all the other opportunities you have. Trading in the model Share Sleuth portfolio, however, lifts the stress levels higher even though no money is at risk, because you, the reader, may be influenced by my decisions.
So you may have detected angst in last month’s column, when I removed four companies from the portfolio. I was so traumatised that I resolved not to consider more than one trade a month in future. In December, I chose Cohort.
I added Cohort to the portfolio five years ago, and since then I have not traded the shares. I have learned more about it in five years of ownership, though, and the December share price looked attractive. With 10 per cent of the portfolio in cash, perhaps it would be worth adding some more shares in Cohort.
Cohort is a defence technology company. Defence is an industry not known for its openness (though I find Cohort quite forthcoming), and technology is always changing. To add to the complexity, Cohort is not one, but a group of four semi-autonomous businesses, and it sells expertise as well as technology. It trains armed forces, conducts research and provides operational support, in addition to supplying hardware and software such as secure databases, communications systems and torpedo launchers. Directly or indirectly, Cohort earns most of its revenue from the Ministry of Defence (MoD), and for most of this decade the UK government has been reducing defence spending in real terms. A sharp decline in research and training, which the MoD can delay or bring in-house, has led to the closure of SCS, one of Cohort’s subsidiaries, in the year to April 2017.
Cohort would have experienced a significant decline in revenue and profit that year, had it not reduced its dependence on the MoD by acquiring EID, a Portuguese supplier of communications systems; but I think that perhaps the worst is over. Cohort remains highly profitable, and the bits of Cohort that supply technology and services as opposed to just know-how grew. Partly as a result of the addition of EID and the closure of SCS, these businesses now account for a substantial majority of Cohort’s revenue.
MASS, another subsidiary, has won a contract to train Metropolitan police officers to extract information from seized electronic devices, research new techniques, and ultimately provide a broader digital forensics service. It has also extended a training contract with the armed forces inherited from SCS. These contracts demonstrate that Cohort’s consultancy activities live on.
Cohort says the autonomy of its subsidiaries is a strength. The MoD and big defence contractors prefer to work with small businesses because they make decisions faster, but they’re also financially less stable. However, as part of a bigger group, Cohort’s subsidiaries can be both flexible and relied upon to deliver contracts over the long term.
The company has vastly experienced managers but I do wonder, as Cohort grows, whether it will be able to retain the ‘light touch’ operational and financial controls that give its subsidiaries autonomy, while directing subsidiaries to share technical expertise and access to customers. Strategically, I suspect that its subsidiaries might grow apart.
A share price of 340p values the enterprise at £143 million, about 16 times average profit in 2017. The earnings yield is 6 per cent. Despite my strategic unease, I added 796 new Cohort shares, almost doubling the portfolio’s holding to 5 per cent of its total value. The deal price was 341.8p and I deducted £10 from the cash balance in lieu of fees.
Next month I expect to turn my attention to Games Workshop, which has grown to 9 per cent of the Share Sleuth portfolio’s value. Maybe it’s time to take a little profit. Portfolio members Dewhurst and Treatt are profiled in Share Watch this month, along with three other companies.
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