Today, embattled defence giant Cobham announced a £500m rights issue at the same time as it unveiled a 37 per cent fall in pre-tax profits.
The aerospace firm issued its fifth profit warning in less than two years in February, and its outlook for 2017 isn't looking any rosier. Cobham said it will be "challenging to deliver a similar performance to that of 2016 in 2017".
Investors weren't phased by the steep declines, however, and shares rose as much 9.84 per cent in afternoon trading.
The worst is over
Mike van Dulken, analyst at Accendo Markets said investors are reacting positively because of optimism surrounding new management's two-year turnaround plan of leverage reduction, disposals and decision streamlining and hopes that the worst is behind Cobham.
Even a £500m rights issue (another one, fully underwritten by banks, planned for the second quarter) and extension of the dividend suspension is being well received.
Van Dulken said this signals belief that short-term pain to bolster the balance sheet is worth it to ensure long-term stability and share price recovery.
A sign of things to come
Neil Wilson, senior market analyst at ETX Capital said the rally might be the start of better things to come.
"A burgeoning US defence budget has to be a positive and the rights issue, coupled with much a much tighter grip on cost controls, will help."
Chief executive David Lockwood seems prepared to tackle legacy issues head-on. The rights issue is a must-do as net debt, at more than £1bn is 3x earnings and a little close to breaching covenants (x3.5) for comfort – it would only take another write down or two to go through this level. Balance sheet strength is also essential to maintain future earnings growth and it admits that it is not strong enough at present.
But the outlook isn’t great, Wilson said. "Indeed the review of the business may throw up further concerns and more write-downs. Today’s rights issue may also be seen as a sign that Cobham expects to find another skeleton or two."
Cobham's stock plummeted in February as investors feared Cobham's struggles might go further than anyone realised.
"It all comes back to the bad investment that was its acquisition of Aeroflex, the wireless business, for £900m in 2014. This was too high a price and Cobham has struggled ever since," Wilson said.
Analysts at Liberum reiterated a "hold" rating today, saying the firm's statement highlights "profit was impacted by weakness in management and financial controls; contractual and commercial failures and, in a few businesses, more challenging market conditions".
The chairman intends to effect a rolling programme of further material board changes over the next two years.
New management are in early stages of remedial actions.
David Lockwood took over as Cobham's chief executive at the beginning of the year, replacing Bob Murphy who stepped down to "pursue other opportunities".
Andy Chambers, analyst at Edison Investment Research said management's opening comments today suggest a determined effort to get the heart of Cobham back on track.
Whilst fix, close, sell does not appear to be the strategy, we suspect the problem areas are likely to wholly or in part require substantial attention, and non-core activities will ultimately leave the group.
These actions should achieve the arrest, but the reversal is unlikely to commence until after the rights issue, which is likely in May, or even the first major update from the new management, which should come with the interim results.