Interactive Investor

ii view: defence company Chemring details record orders

This FTSE 250 company makes missile countermeasures as well as high-tech electronic warfare equipment. We assess prospects.

12th December 2023 11:50

Keith Bowman from interactive investor

Full-year results to 31 October

  • Revenue up 18% to £473 million
  • Adjusted operating profit up 16% to £69 million
  • Order book up 42% to £922 million
  • Final dividend of 4.6p per share
  • Total dividend for the year up 21% to 6.9p
  • Net debt doubled to £14.4 million

Chief executive Michael Ord said: 2023 was another year of strong group performance; and in an environment of increasing global uncertainty demand continues to grow for our mission-critical products and services. 

“The outlook for global defence markets is increasingly robust, with continued growth expected over the next decade. This growing visibility gives us the confidence to continue to invest for the future, balancing near-term performance with longer-term growth and value creation.”

ii round-up:

Defence group Chemring Group (LSE:CHG) today detailed a record annual order intake as conflicts in both Ukraine and Israel heightened concerns globally for increased geopolitical tensions.

New orders for the year to the end of October hit an annual record of £756 million, pushing the firm's order book to its highest in a decade and helping adjusted operating profit and the dividend climb 16% and 21%, respectively, to £69 million and 6.9p per share.  

Shares for the FTSE 250 company retreated marginally in UK trading having come into this latest news up around a tenth year-to-date. That compares to a gain of just over a fifth for defence equipment giant BAE Systems (LSE:BA.) and a more than doubling in price for civil and military engine maker Rolls-Royce Holdings (LSE:RR.) during 2023. 

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 electronic sensors and information business supplies products to detect biological and chemical weapons, as well as being used in the theatre of electronic warfare.

New order intake for the year came via both divisions, with that of countermeasures and energetics rising 52% to £541 million and orders for electronic sensors and information climbing 10% to £215 million. 

Accompanying management outlook comments flagged unchanged year-ahead expectations with almost four-fifths of expected 2024 revenues covered by its current order book. 

ii view:

Headquartered in Romsey, Hampshire, Chemring customers range from national defence organisations to security and law enforcement agencies, as well as commercial markets including that of space. Employing around 2,600 people, it supplies customers situated in more than 50 countries. Its Countermeasures and Energetics division generates most of its revenues at around three-fifths, while its Roke technology unit within its sensors and electronics division continues to prove a high management focus. 

For investors, defence orders can prove volatile with the timing of contracts often unpredictable. Factors outside management’s control such as quality control for other parts suppliers should not be ignored. Costs for businesses generally remain heightened. Currency movements can offer headwinds, while defence expenditure is politically driven and arguably easier to cut than, say, health or education.

More favourably, tensions between the West and Russia and China persist with defence spending now more of a priority for many governments. Its Roke technology business has been growing given an emphasis on arenas such as cybersecurity, secret cloud, and artificial intelligence, while its dividend payment has increased consecutively for more than the last five years leaving its shares sat on a historic and estimated future yield of around 2%. 

For now, and while risks remain, increased geopolitical tensions and a consensus analyst estimate of fair value sat at over 375p per share should keep existing shareholders at least sitting tight.  

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

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