Interactive Investor

ii view: electronic warfare aids defence supplier Chemring

14th December 2021 11:37

Keith Bowman from interactive investor

Order book up, profits up and the dividend up. We assess prospects for this FTSE-250 constituent. 

Full-year result to 31 October

  • Revenue down 2% to £393 million
  • Adjusted operating profit up 5% to £57.5 million
  • Final dividend up 23% to 3.2p per share
  • Total dividend for the year up 23% to 4.8p per share
  • Net debt down 45% to £26.6 million

Chief executive Michael Ord said:

"Despite being another challenging year in which we have continued to operate under the restrictions of Covid-19, I am delighted with the financial and operational progress that has been made across Chemring. We have continued the process of transformation that was launched in 2019 as we build a stronger, higher quality and technology focused business. 

“Trading since the start of the current financial year has been in line with expectations. With 84% of 2022 expected revenue covered by the order book, the Board's expectations for 2022 performance are unchanged.”

ii round-up:

Defence equipment maker Chemring (LSE:CHG) today delivered operating profit in line with management expectations as it propelled the final dividend payment 23% higher to 3.2p per share. 

Despite battling a currency headwind, adjusted operating profit climbed 5% to £57.5 million, matching forecasts for between £56 million and £59.6 million, helped higher by an increase in the order book to £501 million from last year’s £476 million. 

Chemring shares moved marginally higher in UK trading, having gained by more than 60% since pandemic induced market lows back in March 2020. Shares for takeover target Meggitt (LSE:MGGT) are up by around 200%, while sector giant BAE Systems (LSE:BA.) is up by just under a quarter.

Chemring’s countermeasures and energetics products are used by military aircraft to fool ground-to-air missiles, provide cutting edge raw materials and aircraft safety components. Its electronic sensors and information business supplies products to detect biological and chemical weapons and are used in electronic warfare. 

Growth in higher margin Sensors and Information products and ongoing operational improvements, particularly at its UK countermeasures site, more than offset headwinds such as delays in the US Department of Defence procurement process and various supply chain and inflationary pressures.

Order intake over the year on a currency adjusted basis rose by 3% to £448.6 million, with revenue on the same adjusted basis up 1% to £408 million. 

Management expectations for 2022 stayed unchanged. The FTSE 250 company will now target a medium-term dividend policy for a payment covered 2.5 times by underlying earnings per share. That potentially allows for payment growth given existing cover of 3.5 times.  

ii view:

Chemring makes high-technology products and provides services to the aerospace, defence and security markets. Countermeasures and energetics generate its biggest slice of sales at around two-thirds of the overall total. It employs around 2,300 people worldwide, with just over half of all its revenue made in US dollars.  

Its Roke, or security information related business within the Sensors and Information division has been gaining increasing focus. Government emphasis on cyber security, secure networks, secret cloud, artificial intelligence, data science and autonomy are all offering it opportunity. Roke delivered double digit growth in orders, revenue and underlying operating profit over the year. 

For investors, currency moves, particularly for the US dollar, can impact. Orders can be volatile, and the timing of contracts is often unpredictable. Government defence expenditure is politically easier to cut than say health or education. 

On the upside, its order book has continued to grow, along with the dividend payment. A historic dividend yield of over 1.5% is not completely derisory in an era of ultra-low interest rates, while a focus on operational efficiency and bolt-on acquisitions have also added to trading momentum. In all, and with the lines between technology, defence and security blurring and analysts calculating a fair value price per share of 386p, more speculative investors may have Chemring on their radar.

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:

Strong buy

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