ii view: investors pile back into Chemring shares after update pleases City

This defence contractor has comfortably outperformed the wider FTSE 250 index during 2022. Buy, sell, or hold?

Trading update for the five months to 30 September

• Order book up 39% from April to £678 million

ii round-up:

Defence equipment maker Chemring Group (LSE:CHG) today reported trading in line with management expectations as it detailed further contract wins despite the challenging macro economic environment. 

The order book for the Hampshire headquartered FTSE 250 company had risen to £678 million as of the end of September, up from £488 million on the 30 April. That has been helped by a rise in the US dollar, with its translation to sterling adding £40 million, while order cover for the full year 2023 had continued to build.

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Chemring shares rose by 5% in UK trading, leaving them up by close to a tenth year-to-date. Shares for fellow defence contractors BAE Systems (LSE:BA.) and QinetiQ Group (LSE:QQ.) are up by around a half and a quarter in 2022, while civil and military engine maker Rolls-Royce (LSE:RR.) has fallen by two-fifths. The FTSE 250 index is down by a quarter year-to-date. 

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.

Order cover for expected full year 2023 revenues at its Countermeasures & Energetics division was running at 83% as of the end of September and at 60% for the Sensors & Information business. 

Its specialist consulting and technology business, Roke, sat within its Sensors & Information division, recently won a £30 million UK government contract to develop the next generation of radar products, known as Hyperion, to address the challenges associated with hypersonic missile defence. 

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Activity at Roke had stayed buoyant, with order intake in the year-to-date up 75% to £156 million. Government emphasis on cyber security, secure networks, secret cloud, artificial intelligence, data science and autonomy are all offering it opportunity.

Full-year results to the end of October are scheduled for 13 December. 

ii view:

Founded in 1905 making timers for gas street lighting, Chemring today makes high technology products and offers services to the aerospace, defence and security markets. Employing over 2,000 people worldwide, its Countermeasures and energetics division accounts for its biggest slug of sales at close to two thirds, with the USA generating around half of its overall business.  

For investors, defence orders can be volatile, with the timing of contracts often unpredictable. Government defence expenditure is politically easier to cut than say health or education, while a price to net asset value ratio standing above the three-year average may suggest the shares are not obviously cheap.   

On the upside, the order book has continued to grow, its focus on building a stronger, higher quality and more resilient business continues, while the dividend, although not overly generous at an estimated 1.9%, has been increased consecutively for the last five years. 

On balance, and with the lines between technology, defence and security blurring and analysts currently calculating a consensus fair value price of around 390p per share, cause for longer term optimism arguably persists. 

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:

Buy