ii view: Chemring profits excite investors

Profit up, debt down and a dividend being paid. Investors chase Chemring higher. 

Half-year results to 30 April 2020

• Revenue up 37% to £191 million
• Adjusted operating profit up 112% to £25.2 million
• Net debt down 28% to £61 million 
• Dividend payment up 8% to 1.3p per share

Chief executive Michael Ord said:

"As a global team we are working to build a stronger and higher quality business, and the resilience the Group has demonstrated during the coronavirus pandemic shows we are making solid progress. Despite the changing and challenging environment in which we are currently working, we have delivered a strong performance in the first half of the year.

"Our sites have remained open and we have made every effort to sustain operations in support of our customers and their essential defence and security missions.

"Noting the challenges presented by the coronavirus pandemic, some positive timing differences which benefited the first half, and with approximately 95% of expected H2 revenue already in the order book or delivered to date, the board's expectations for the full year are unchanged."

ii round-up:

Defence manufacturer Chemring Group (LSE:CHG) posted a gain in both profit and orders in these latest results as operations remained ongoing during the corona crisis. 

Adjusted operating profit jumped by 112% to £25.2 million, as new orders from the US helped pushed its order book up to over £500 million from a previous £449 million.  

Chemring products include sensors used in air defence detection systems and countermeasures used by military aircraft to fool ground to air missiles.   

Chemring shares jumped by 25% in UK afternoon trading. Its shares are up by 12% year-to-date and by nearly 50% over the course of 2019. BAE Systems (LSE:BA.) shares by comparison are down by 10% during 2020, although rose by more than 20% in 2019. 

Operations in the US, UK and Norway have all continued to operate given their status as critical under Covid-19 lockdowns. Its Australian operation also remained ongoing where orders from the local military added to the group’s success over the half-year. 

Liquidity, including cash and undrawn facilities, totals £188 million. Strong operational cashflow helped group net debt to fall by 28% year-over-year to £60.6 million. 

Around 95% of expected second-half revenue is either in the order book or has been delivered to date, leaving management’s full-year expectations unchanged. Approximately £179 million of the £504 million order book is scheduled for delivery in the second half.  

ii view:

Chemring employs around 2,500 people worldwide. It has production facilities in the UK, US, Norway and Australia. It operates across the two divisions of Sensors & Information and Countermeasures and supplies customers in more than 50 countries.

Following a series of previous profit warnings, Chemring has been pursuing a ‘Building a Stronger business’ transformation programme over the last 18 months. It has been highlighted by management as helping to give the company resilience during the Covid crisis. 

For investors, the defence business can be volatile. The timing of contracts is often unpredictable, while government defence expenditure is regularly reviewed when ballooning national debt requires cutting. That said, evidence of management action to improve performance has emerged in these latest results, while news of a company increasing its dividend is a rare pleasure during the pandemic. In all, while still for the higher risk investor, speculative investors may be tempted by Chemring.  

Positives: 

• Growing order book
• Reduced debt

Negatives:

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

The average rating of stock market analysts:

Buy