ii view: Chemring fires beyond expectations

Profit up, orders up, dividend up. Investors look again at this defence maker. 

Full-year results to 31 October

• Revenue up 20% to £402 million
• Adjusted operating profit up 24% to £54.7 million
• Net debt down 36% to £48 million 
• Final dividend up 8.3% to 2.6p per share
• Total dividend payment up 8% to 3.9p per share

Chief executive Michael Ord said:

"Our focus in recent years has been on putting in place the foundations on which to build a stronger, higher quality business. The resilience of the Group in response to the coronavirus pandemic is a consequence of the dedication and commitment of all our people and clearly demonstrates the significant progress that we have made. 

"Trading since the start of the current financial year has been in line with expectations. With 78% of 2021 expected revenue covered by the order book, the Board's expectations for 2021 performance remain unchanged.”

ii round-up:

Defence manufacturer Chemring Group (LSE:CHG) today reported profits which beat City forecasts following strong performances for both its sensors and information and countermeasures and energetics divisions. 

Revenues climbed by a fifth year-over-year, with adjusted operating profit of £54.7 million ahead of analyst forecasts of between £47 million to £53 million.

Chemring shares rose by more than 10% in UK trading, leaving them up by just over 25% year-to-date. Shares for rival defence contractor Babcock International (LSE:BAB) have halved in 2020, while shares for BAE Systems (LSE:BA.) are down by around 10%. 

The sensors and information division received its first electronic warfare product sale for the major US marketplace. The countermeasures division won a $107 million deal, again in the US, for protective measures for its F-35 military aircraft. 

The order book year-over-year rose by 6% to £476 million, of which around £326 million is scheduled for delivery during 2021. That locks in approximately 78% of expected 2021 revenue. 

Operations in the US, UK and Norway all continued to operate under the pandemic, given their status as critical. Its Australian operation also remained ongoing. 

Disciplined working capital practices and no required staff pension contribution helped net debt to retreat by just over a third to £48 million, leaving it with a net debt to adjust earnings (EBITDA) ratio of 0.65 times. 

ii view:

Chemring employs around 2,300 people worldwide. Its products include sensors used in air defence detection systems and countermeasures used by military aircraft to fool ground to air missiles. It supplies customers in more than 50 countries.

It is currently pursuing a strategy to deliver profitable growth by operating in markets where it has differentiators such as intellectual property, niche technology, high barriers to entry and deep long-term customer relationships. Following previous profit warnings, it also embarked on a ‘Building a Stronger business’ transformation programme. The programme was again highlighted by management as helping to give the company resilience during the pandemic.

For investors, the defence business can be volatile. The timing of contracts is often unpredictable. Government defence expenditure is politically easier to cut than say health or education. That said, despite a change of US President, much of Chemring's US work is already locked in for delivery, while the UK government in November pledged an increase in spending over coming years. In all, with these latest results offering further evidence of success for management under its transformation programme, and the order book rising, higher risk investors may continue to accumulate shares for the longer term.   

Positives: 

• Business and geographical diversity
• An increased dividend payment

Negatives:

• Defence is a volatile industry
• Covid could still impact customer product delivery and testing

The average rating of stock market analysts:

Buy