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22 August 2016 · 3 min read

A New Year’s resolution for Cobham?

CEO and CFO to move on from the struggling Aerospace & Defence company

Three years ago I, and many others, expected Cobham to be given a fresh lease of life by its new CEO Bob Murphy and CFO Simon Nicholls who joined the company in 2012 and 2013 respectively. Mr Murphy was the first American to take the helm of a business whose largest customer is the US Department of Defence (DoD), and Mr Nicholls was the highly respected CFO of Senior, where he had a reputation for cost cutting and attention to detail. Whilst Cobham has made some progress under their stewardship, the past three years have also been turbulent for the company. Here we stand in 2016; a year which has seen the company profit warn, require a £500m rights issue and the CFO resign. To cap it off, it was announced last Wednesday that Mr Murphy is to leave the company in order to ‘pursue other opportunities’, ending months of speculation over whether he would remain as CEO. So what has gone wrong and what does this change in management mean for the company?

From my external perspective, it looks as though there have been two problems at Cobham in the past few years. Firstly its acquisition of Aeroflex seems with the benefit of hindsight to have been a poor deal. Whilst I accept it may still deliver growth in the future, the £900m price paid looks expensive for a business which has subsequently underperformed. Together with adverse FX movements this led to Cobham approaching its debt covenants and forced the company into the £500m rights issue earlier this year. Secondly, Mr Murphy does not appear to have had the correct leadership and management skills to unify and control Cobham’s disparate businesses. He tried to instill common working practices, however, it is not a ‘one size fits all’ business. Culturally and technically I suspect his aim was unachievable and instead frustrated a number of business units. In addition, two senior executives were dismissed from the Wireless business earlier this year after “mistakes” with revenues from contracts - an error that forced Cobham to take a £9m charge.

Cobham is a complicated company which some in the stock market shy away from. It largely deals in high end aerospace and defence communications technology. Its positioning as primarily a Tier Two/Three/Four supplier rather than a prime contractor makes it challenging to understand the range of products and markets it is exposed to – which are mainly small subsystems and components. Also, management has been highly acquisitive in the past so it has a diverse business portfolio. However, in 2015 the company said it was on the verge of returning to organic growth for the first time since 2009 and with the market chasing exposure to good value A&D stocks, Cobham started to feature on many investor’s radars.

Unfortunately sustained organic growth has not yet materialized and margins have been under pressure due to a number of products being in the development and initial delivery phases. The potential for success is there though. Cobham has a number of businesses with market leading positions, most notably air-to-air refueling (AAR) and Satellite Communications (SATCOM). It is exposed to the structural growth story of civil aerospace, and defence markets are now returning to growth after a lean period. However, the task facing the new CEO David Lockwood and CFO David Mellors should not be underestimated. A number of challenging programmes are due for delivery, including AAR equipment on the A400M, KC-46 and KC390 tankers and SATCOM equipment for Inmarsat’s new Global Express network.

Mr Lockwood is an accountant by profession but has an Aerospace & Defence background having worked at BAE Systems, Thales and GPT (Marconi). His two most recent roles; BT and Laird, have been in the sphere of connectivity which should provide some useful overlap to Cobham. Mr Mellors is currently CFO of Qinetiq which is known for having strengthened the balance sheet and re-focusing the portfolio, both areas that Cobham needs to address. 

Mr Lockwood and Mr Mellors are both due to be in post no later than Jan 2017. It is not normally ideal to change CEO and CFO at the same time as there is no continuity but given Cobham’s torrid 2016, the incoming management team may relish the opportunity to make some New Year’s resolutions for Cobham. Let’s hope they manage to stick to them.

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