ii view: Chemring Group in demand on results day

Sales up, profit up, the dividend up and net debt down. We assess prospects for this UK defence company. 

Full-year results to 31 October

• Revenue up 13% to £443 million
• Adjusted operating profit up 11% to £64 million
• Final dividend up 19% to 3.8p per share
• Total dividend for the year up 19% to 5.7p per share
• Net debt down 73% to £7.2 million

Chief executive Michael Ord said:

"This has been another year of positive performance and growth across the Group, exceeding the Board's initial expectations despite a challenging macro-economic environment. I am delighted with the financial and operational progress that continues to be made across the Group as we build a stronger, higher quality and technology focused business.

"Chemring is well placed, with a robust strategy, market-leading positions across different geographies and sectors, and with products and services that are critical to our government and blue-chip customers around the world. Chemring's long-term prospects remain strong."

ii round-up:

Defence equipment maker Chemring Group (LSE:CHG) today detailed a double-digit gain in profit as it kept its guidance for the year ahead unchanged, helped by a near one-third rise in its order book to £651 million. 

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Profit for the year to the end of October rose by just over a tenth to £64 million as demand for its products such as military aircraft countermeasures, used to fool ground to air missiles, proved strong in an environment of high geopolitical uncertainty following Russia’s invasion of Ukraine. 

Shares for the FTSE 250 company moved marginally higher in UK trading having come into this latest announcement up by around 2% year-to-date. That compares to a fall of around a fifth for the wider FTSE 250 index during 2022, while UK defence giant BAE Systems (LSE:BA.) is up by around a half year-to-date. 

Chemring’s other electronic sensors and information division supplies products to detect biological and chemical weapons and assist within the arena of electronic warfare.

Overall group sales rose by 13% to £443 million, with revenues for Countermeasures and Energetics business growing 14% to £281 million and demand for electronic sensors and information business improving 11% to £162 million. 

Sales for its specialist consulting and technology business, Roke, sat within the Sensors & Information division, exceeded £100 million for the first time. It previously won a UK government contract to develop the next generation of radar products, known as Hyperion, to address the challenges associated with hypersonic missile defence. 

The final dividend increased by nearly a fifth to 3.8p per share, pushing the overall payment for the year up by the same to 5.7p per share. Net debt fell by almost three-quarters to under £10 million. 

Around 86% of Chemring’s expected revenues for the full year 2023 are covered by its order book, up from 84% this time last year. 

ii view:

Chemring employs around 2,300 people worldwide and supplies customers in more than 50 countries. Its headcount has doubled in the last four years to around 800 people. Its security information related business Roke has also been gaining increasing focus. Government emphasis on cyber security, secure networks, secret cloud, artificial intelligence, data science and autonomy are all opportunities for Chemring.

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For investors, defence orders can be volatile, with the timing of contracts often unpredictable. A price to net asset value ratio above the three-year average may suggest the shares are not obviously cheap, while government defence expenditure is politically easier to cut than say health or education.

More favourably, demand for its products remains evident via a near one-third increase in the order book year-over-year. Management’s focus on building a stronger, higher quality and more resilient business is ongoing, while the dividend, although not particularly generous on a yield of under 2%, has been increased consecutively for the last six years. 

In all, and with the lines between technology, defence and security blurring, and analysts currently calculating a consensus fair value price of over 375p per share, the investment case remains sound.

Positives: 

• Business and geographical diversity
• Progressive dividend payment

Negatives:

• Defence is a volatile industry
• Exposure to currency movements

The average rating of stock market analysts:

Buy