ii view: Chemring senses opportunity in high-tech niches

Countermeasures plus electronic warfare and cyber security. We assess prospects. 

First-half results to 30 April

• Revenue up 4% to £198.5 million
• Adjusted operating profit up 10% to £28 million
• Net debt down 36% to £39 million 
• Interim dividend up 21% to 1.6p per share

Chief executive Michael Ord said:

"Chemring's positive first half performance again demonstrates the progress that we continue to make in building a higher quality technology-based Group. With strong order cover for the full year the Group remains on track to deliver year on year growth, and the Board's expectations for the full year remain unchanged.”

ii round-up:

Defence and technology company Chemring Group (LSE:CHG) divides its products up into two broad arenas.

Its electronic sensors and information business supplies customers across the commercial, national security and defence domains. Its sensors are used to biological and chemical weapons, explosive materials and in electronic warfare. 

At its other countermeasures and energetics businesses, its products include countermeasures used by military aircraft to fool ground to air missiles, cutting edge raw materials and aircraft safety components. 

It employs around 2,300 people worldwide and supplies customers in more than 50 countries.

For more on these latest results, please click here. 

ii view:

Countermeasures and energetics currently generate its biggest slug of sales at around two-thirds of the overall total. The US provides its largest marketplace at just over half of all sales, with the UK coming in second at just over a quarter and Europe accounting for around a tenth. 

Chemring is 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. Its modernisation and operational excellence programmes are continuing, although management’s attention is now shifting towards the growth of its sensors and information segment.

Within that segment, its security-related business Roke has been gaining increasing focus. During this latest first-half period, Roke again recorded double-digit growth in orders, revenue and operating profit. A government emphasis being placed on cyber security, secure networks, secret cloud, artificial intelligence, data science and autonomy are all helping to expand opportunities for Roke to deploy its market leading technologies – capabilities now added to by the acquisition of Cubica Group.

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 its US work is already locked in for delivery and the UK government in late 2020 pledged an increase in spending over coming years. In all, with the lines between technology and defence and security blurring, and analysts calculating a fair value price per share of 368p, higher risk investors may continue to accumulate holdings for the longer term.   

Positives: 

• Business and geographical diversity
• An increased dividend payment

Negatives:

• Defence is a volatile industry
• Exposure to currency movements

The average rating of stock market analysts:

Strong buy