ii view: Chemring order book hits record above £1 billion

First-half results to 30 April

• Revenue up 8% to £223 million
• Adjusted operating profit down 5% to £25 million
• Order book up 39% to £1.04 billion
• Interim dividend up 13% to 2.6p per share
• Net debt up 200% to £75 million

Guidance:

• Targeting annual revenue of £1 billion by 2030

Chief executive Michael Ord said:

"The increase in geo-political tensions around the world is driving a fundamental rearmament upcycle which is expected to last for at least the next decade. This visibility, together with the support of grant funding and our customers' desire to move to long-term partnering agreements, gives us the confidence to invest further in capacity and capability, reinforcing Chemring's position as a key supplier to NATO, and positioning the Group well for the future.”

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ii round-up:

Defence equipment maker Chemring Group (LSE:CHG) today detailed record first-half order intake of £345 million, taking its order book to over £1 billion, the highest in its history. 

Revenues for the six months to 30 April climbed 8% year-over-year to £223 million, although adjusted operating profit fell 5% to £25 million, hindered by severe winter weather disruption to its countermeasure operations in Tennessee, USA.  

Shares in the FTSE 250 company fell 1% in UK trading having come into this latest news up by close to a half over the last year. That’s similar to the gain for the UK’s biggest defence contractor BAE Systems (LSE:BA.) and comfortably ahead of an 8% improvement for the FTSE 250 index over that time. 

Chemring’s Countermeasures and Energetics products are used by military aircraft to fool ground-to-air missiles, along with providing cutting edge raw materials and aircraft safety components. Its sensors and information business supplies products to detect biological and chemical weapons, as well as being used in the theatre of electronic warfare.

Accompanying management outlook comments point to increased geo-political tensions globally in driving a fundamental rearmament upcycle which is expected to last for at least the next decade.

Group net debt rose 200% from a year ago to £75 million as it upped investment in factories, with customers increasingly moving to long-term partnering agreements. Investment in its Energetics factory capacity is being increased to £200 million from a previous £120 million.  

A 13% hike to the interim dividend takes the payment to 2.6p per share, with a further £28 million added to the existing £50 million share buyback.  

Chemring is now targeting annual revenue of £1 billion by 2030, up from last year’s £473 million. A full-year trading update may be outlined in early October. 

ii view:

Headquartered in Romsey, Hampshire, Chemring customers range from national defence organisations to security and law enforcement agencies, as well as commercial aerospace markets including that of space. Countermeasures and Energetics generates most of its sales at around three-fifths. Its other Sensors and Information division also includes its specialist Roke technology unit, focused on areas such as cyber security, secret cloud, and artificial intelligence. 

For investors, deferred product deliveries due to bad weather and operational disruption increases pressure on management for a smooth second-half performance. Costs for businesses generally remain heightened. An estimated price/earnings (PE) ratio above the three-year average may suggest the shares are not historically cheap, while defence expenditure is politically driven and arguably easier to cut than say health or education. 

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More favourably, ongoing geopolitical tensions now leave management more confident about investing for future growth. Both product and geographical diversity exist, its Roke business brings a specialist focus on technology arenas and, while its dividend yield is a modest 2%, the company has increased payments consecutively for over six years.

On balance, and while continued geopolitical tensions are not guaranteed, investors have been rewarded with an increased weighting towards defence in a more uncertain world, meaning Chemring remains a favoured play.  

Positives: 

• Business type and geographical diversity
• Progressive dividend payment

Negatives:

• Defence is a volatile industry
• Exposure to currency movements

The average rating of stock market analysts:

Buy